Saratoga Springs, UT · Member since 2017 · 9 posts · 0 votes
I have a 401k from an old job that I am trying to gain access to for investing. The amount is roughly 24k. If I stay in the W2 workforce I will retire in 30+ years. Since I no longer work for that job, I am no longer contributing to that 401k. Based on the analysis from Vanguard (they have my 401k) it will get me about $500 per month in cash flow when I retire. I feel like I can better that number.
I have looked into self directed IRAs or solo 401ks, but am seriously leaning towards just cashing it out. My reasoning is that right now I am in the 25% tax bracket. Assuming all goes well with my future endeavors (I know that is a big assumption) I am hoping to move up to the 35% tax bracket by the time I retire. The way I see it, I take the 25% tax rate now plus the 10% early withdrawal penalty now, or pay 35% later. Based on that math I pat 35% of 24k now, or 35% of 100+k when I hit retirement age. Wouldn't it just make sense to pull it out now? What else am I missing?
Thanks in advance for the help.
Have you considered converting the money to a Roth IRA? That would allow you to pay tax on the seed today, then have a tax-free crop in the future. It would cost you the 25% current tax rate to convert the money today (with no 10% penalty). You would then have a significant amount of tax-free money in the future.
I ran a quick calculator and if you do not add to the $25K with new contributions and average 7% return, it would be worth $190K in 30 years.
You could do that within the conventional brokerage sphere or with a self-directed IRA for investing in real estate. Either way, you could really come out way ahead.
Have you considered converting the money to a Roth IRA? That would allow you to pay tax on the seed today, then have a tax-free crop in the future. It would cost you the 25% current tax rate to convert the money today (with no 10% penalty). You would then have a significant amount of tax-free money in the future.
I ran a quick calculator and if you do not add to the $25K with new contributions and average 7% return, it would be worth $190K in 30 years.
You could do that within the conventional brokerage sphere or with a self-directed IRA for investing in real estate. Either way, you could really come out way ahead.
Depending the investment that you are considering, both a solo 401k and an IRA may allow you to make such investment. You may also want to consider converting the 401k to a Roth IRA and then making the investment, as all the income will grow tax free.
Thanks for your responses. I will research a Roth IRA a little more. It is my understanding that cash flow from a rental would need to be reinvested into the IRA fund right? Also I can't mix in personal funds? I am hoping to get out of the W2 world and live off passive income.
With a self-directed IRA or 401(k), you are keeping the funds in the tax-sheltered retirement plan and that plan is then investing in real estate instead of stocks, etc. This is not a means for you to access the funds for your own business. That said, if you can accept the concept of delayed gratification, you could use such a tool to create a significant amount of tax-free wealth for yourself later in life. Compare that to tapping what is left after the 10% penalty plus state and federal taxes. You will not see a lot of that $25K if you pull it out of the IRA today.