Down Payment Advice: Roll 401K into IRA into Down Payment

[Greg N.]

Hey All,

I plan on purchasing my first property by the end of the year and I'm thinking about how to most effectively use my funds/savings for a down payment (about 20-25K).

I amassed a small 401K balance with my previous employer (around 10K), and rather than rolling it into my new employers' 401K, I figured I could get a better return by using the money towards a down payment.  

From my initial googling-around, it seems like rolling the 401K into a self-directed traditional IRA and using that towards the down payment would be my best bet (will be taxed, but won't have to pay 10% penalty if I just pulled money out of the 401K).

Has anyone ever done this before, or planning on doing it? Would appreciate your thoughts on whether or not this is a great/terrible idea. 

P.S. Going forward, I do plan on saving up some money in my new employers' 401K program to take advantage of their profit sharing model. But, I won't be contributing the max amount as I want to funnel most of my cash towards real estate. 

[Jon Holdman]

When you roll the 401k money into an IRA, the IRA can then buy real estate. But that real estate must belong to the IRA, not you. You cannot use that money as part of the down payment to buy a property in your own name. With only $10K in play, its unrealistic to think about using that for the IRA to acquire a property. The non-recourse loans you can get in an IRA require large down payments, typically 30+%. You cannot personally guarantee those loans.

If your IRA does own real estate, you MUST have sufficient reserves in your IRA to cover any problem. If you have a major problem and need $5000 to fix it, that money must come from your IRA. Or, your IRA must borrow it. You cannot put in your money. You cannot do work on a property your IRA owns.