Can I offset taxes on 401k cash out with real estate investments?

[Bryan Butler]

I may have a new job opportunity and am trying to figure out what to do with my 401k. At first i was going to roll it over into a self directed roth but am also thinking of cashing it out to buy real estate outside of a retirement account. What are some options to bring up with my CPA to offset most or all of the taxes?

[Eamonn McElroy]

@Bryan Butler

If your CPA is worth his or her salt, he or she won't need you to bring income tax mitigation options to the table.  That's (theoretically) exactly what you're paying them for...

Unless you're a RE professional, rental real estate losses are generally "per se" passive and won't be able to offset W-2 and retirement income unless your modified AGI is below $150k.

It's generally not advisable to liquidate a retirement account to start investing as the early distribution will be taxed at not only your marginal income tax bracket but you would also incur a flat 10% penalty on the distribution. For individuals in the highest tax bracket, this could very well mean taking over a 50% haircut on the balance via federal and state income taxes just to "get going." You're going to need an awful lot of ROI just to get back to zero...

If the amount is substantial, you may want to look into rolling it into a qualified retirement account with checkbook control and invest in RE that way.  No haircut involved here...