Early Withdrawal from Solo 401k my only option?

Question

Looking at a Multi family project and the bank is willing to do 15% down however not with a Solo 401k due to the non-recourse loan requirement.  I don't have enough to put down 40 or 50% and I don't want to miss out on the deal.

If I pull out for instance $100k, I get hit with a 10k (10%) penalty then taxes (assume 25% federal, 5% state) on the full 100k as well right?  so I would only net 60% of the balance after the dust settles.

I have enough to make up the other 40% in non retirement money so I can still close the deal.  I feel like it is worth it as I have been loaning that money out and getting a return of 12-15% but it has been just doing short term hard money loans.  I have purchased a few smaller multi-family places with the Solo 401k but use the cash distributions from those properties to go right back into the account.

The loan approach is maxed out at $50k I understand.  that will not be enough.

Edward B. · Answer

@Judd Campbell,

DON'T DO IT!!!! Very short sighted. You are going to take a 40% hit right off the bat and remove your money from a tax advantaged account that you can never ever put back? Sure, run the numbers but I find it very hard to believe that is a good play.

Furthermore, if the deal is so good that you are willing to even consider something as drastic as that, there has to be a better way to raise the money. Even if you give up part of the deal or part of the return it will be unlikely to cost you as much as what you are proposing in the long run. Get creative.

Judd Campbell · Answer

@Justin Windham 996 Turbo Sold it in 2014.  Should have bought more RE in 2010 instead of the car to start with!

The rentals bought me this one

Edward B. · Answer

@Judd Campbell, is that a joke about the Aston? Because if you have that much equity in the car, why not refinance that? Pay that loan down with the proceeds from the deal. Is there anything else you can borrow or cross collateralize from? Friends, family, or fellow investors that may want a piece of the deal as a lender or equity share? That may be willing to lend you money secured by some other asset that you could use for this deal?

Besides, what are you going to do when the next deal comes along? You already went to the 401k well, so just shrug your shoulders and walk away? No, you are going to figure out how to make that happen, so just do that now. Taking from your 401k is the easy answer and unreversible. Easy is boring. Learn something new that you will be able to apply again and again.

Judd Campbell · Answer

@Edward B. , how about a $50k loan then use cash and give up some equity to another partner?  I could use the operating income from the project to pay on the loan.

The deal is undervalued for the market and after we put a few hundred k into the project the plan is to refinance 2-3 years down the road and pull some of the down payment out of the project.  I can always make a lump sum contribution at that time. I am contributing ~$40k annually to retirement accounts so I am not skimping on retirement.

I have plenty of equity in my properties but because they are mostly 4 units or below I am looking at 10-80k per property.  and I like the terms on the ones with the most equity.

I am at 36 doors now and this deal would really accelerate things for my family.

I could sell my Aston, but dang it I really like it!

Justin Windham · Answer

@Judd Campbell

Very nice. I still like the 996T, but the Aston is a beautiful car. I have to constantly deny urges to upgrade sports cars for the sake of wealth, but the 997T is very tempting.

Justin Windham · Answer

@Judd Campbell

Looks like the additional searching may be paying off. Pulling out some equity sounds like a much better plan than taking an early 401k distribution. What gen was the 911T?Best wishes with the investment!

Judd Campbell · Answer

@Edward B. Thanks for the ass kick!  yes, I do own it outright, I had a 911 Turbo I sold to use the cash for units 7&8 back a few years ago, then when I hit 30 I bought the Aston.

I just reached out to my banker to talk through options and he can come in on a second where I have a duplex with nearly 100k in dead equity.  That will pull me out $50k, I may be able to do this without touching the Solo 401k (or the DB9) at all!

Dmitriy Fomichenko · Answer

Giving up 40% to uncle Sam vs. continuing to invest tax-deferred does not sound like a wise financial move...

John-David Herlihy · Answer

@Judd Campbell I would see what you can do to make the loan work. If you need $100k for the down payment, the net difference of a loan vs early distribution is “only” $10K. That is in the range of an allowable “gift”. Perhaps there is an investor that would like to JV the deal with you? As @Edward B. alludes to, think about how well that 40% can grow in your 401K, The house would have to cash flow like a best to be worth the difference. Also, the 40% estimate may be low, as you would increase your gross income by $100K and could easily move tax brackets.

Early Withdrawal from Solo 401k my only option?

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