Pulling money out of Roth 401k to invest in RE?

Question

Hi all,

I am a newer member on BP and this is my first post. I am looking for thoughts on whether I should pull money out of my Roth401k from work to invest in RE? I know typical tax advisors etc would tell me no way but looking for some alternative thoughts or recommendation of a tax advisor locally that I could consult with on this.

A few points-

1. Not that much money - 8500 dollars

2. Not much is earnings- 10% gross return over last 3 years~ 800 bucks of earnings

3. Have a lot more money in my pretax 401k I was planning to leave put, if possible to liquidate just roth account with my current company

Cheers,

Ben

Ben S. · Answer

Hey everyone,

Appreciate all of the  comments. Did a bit of due diligence today and realized as mentioned by George that the Roth 401k is only available for hardship withdrawals during employment.

As suggested by several posts above, I can still use the option of the 401k loan through my employer and will still have access to a good down payment on a property.

A ton of good responses and ideas. At least I'm to the bottom line of my options.

Ben

Don Spafford · Answer

@Ben Smith I am borrowing, not withdrawing, from my 401k now to buy a 4 plex. Borrowing is fine, do not withdraw, huge fines for doing that. I can put it in terms to repay back to myself tax free up to 5 yrs, just charges interest which goes to me as well, so no real loss other than any possible gains during that period, but the cash flow I get from the property is more than the money that gets paid back to my 401k from my paychecks and the expected rise in equity will surely be worth more than the gains I'm getting with that amount of money in the 401k. Can pay it off at anytime when I have the lump sum. But you would have to find out your plan's details and what they allow you to borrow, if anything, and the terms to repay. I'm hoping to be able to quit my job for good within 5 yrs so I can pay that loan back and be free of the job at the same time.

Ben S. · Answer

Thanks for the response and add. I have other funds that I would apply the 8500 to. I think I just need to Contact my 401k account manager and make sure I can liquidate just the Roth portion and not the straight 401k. I may try to roll the 401k over later on to a self directed account since there is quite a bit more money in that account.

Thanks again, Ben

Dmitriy Fomichenko · Answer

P.S. your picture is sideways, you may want to adjust that:

Bernard Reisz · Answer

@Ben Smith Be aware that "ordering rules" for Roth 401(k)s differ from those for Roth IRAs. Whereas for Roth IRAa, distributions are deemed to first come from amounts contributed ("basis") and are thus not taxable up to the total amount contributed, Roth 401(k) distributions come out of basis and taxable earnings on a pro rata basis.

The following link to the IRS website should be helpful:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts#distns

George Blower · Answer

Dmitriy, if it is Roth 401k funds, and if they stem from employee contributions, then generally the 401k participant is still required to meet the one of the distribution triggering events.

Dmitriy Fomichenko · Answer

George, I think he is considering taking a distribution not rollover. Is that correct Ben? There should be no restrictions on the distribution,  it is his money, the contributions will come out tax free since it is Roth (post tax), and earnings would be assessed with penalties and taxes because of the premature distribution.

George Blower · Answer

@Ben Smith

If your 401k is with your current employer they may not allow you transfer any portion out until you either separate from service or turn age 59 1/2.

Amy Nakos · Answer

My husband and I do this.  There are very strict rules about your personal involvement in the investment however and you aren't allowed to make any repairs, manage the property, stay at the property, etc.  So, we bought some vacant land in the downturn and will sell it this summer, doubling our initial investment of $189K.  We also have to have annual "accounting valuations" of our IRA accounts and this requires hiring an accountant with some expense.  While my husband deals with all the details, I know the IRS sends us numerous letters and requests for additional information and it can be a headache, but I think it's brilliant to buy real estate with your investment accounts.  We use a company called Accuplan as our intermediary to hold the funds.

Ben S. · Answer

Thanks everybody for the straightforward responses. I agree in certain markets in Texas, the 8500 its about a fourth of the DP for a SFR rental with conventional financing at 20%. I am going to call my custodian and just verify I can take the $ from the Roth portion without messing with the 401k Portion. I know I can take a loan on the 401k as well, if I decide to later on so all good advice.

Ben

Pulling money out of Roth 401k to invest in RE?

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