401k borrow or withdrawal/ cash-out?

Question

My husband and I are 51 and 52 and only recently got into real estate investing so we want to be aggressive in growing our doors. We have 2 single family homes and 1 duplex and now we are pursuing a 4-plex. We cant decide whether to borrow or simply cash-out my husbands Fidelity account. The account is relatively small so there is no way to retire off the current balance. I'd love to hear what other people have done in this situation and the pros and cons of each option. Thanks!

Libby Baugher · Answer

Hi julie! I’m so glad I saw this post! I’m in the same boat as you! I’m single and 53 years old. I just got laid off from my job and now need to decide what to do with my 401k which will be between 58000-60000 after taxes. I’ve already got 4 units (two single family and one duplex). I’ve been seriously thinking of cashing out the 401k and purchasing a couple more properties or using that cash to do the brrrr method over and over instead of rolling it into something else. I’m glad I’ve found someone else who is thinking like me!

Libby

Ashish Acharya · Answer

Borrowing to avoid the penalty is preferred as you have relatively fewer years to reach 59.5. if the deal is dependent on the withdrawal, I would factor in the penalty into the ROI calculation and decide for yourself if withdrawing makes sense.

Taylor L. · Answer

I would lean toward seeing if you can bring investors or lenders in to make up where your cash might fall short. Whether you cash out or not, you'll run out of your own money eventually. Might as well learn how to raise funds from others!

Julie Dillon · Answer

We decided on the cash-out/full withdrawal. It was a VERY hard decision but I'll explain why.

We were very late in starting the retirement account so the balance was under 100K. That amount is paltry and in no way enough to help us through our senior years, so we took a HUGE leap of faith and decided that through our own hard work in growing our investment portfolio, we would get a better rate of return than the 2% the retirement account is making. We're in our early 50's and we have a limited amount of time to get this right ...but better late than never.  We hate the idea of the taxes and penalty but its par for the course. We are pulling out way more money than we ever put in it so to us, we're still ahead. The Fidelity balance was never real money in our eyes,  just a number that plays with our emotions.

We are our own investment vehicle.

Tim Roberts · Answer

@Julie Dillon, I am guessing that one of the SFH's you live in as your primary residence?

Can you borrower a portion of the 401K balance to buy the 4plex?  I don't know that i am a fan of depleting a retire account when you took the time to save/invest into it.  As others of noted, know what the tax penalties and consequences are before you take the money.

If you own a home, you might want to consider a HELOC to get access to more cash allowing you to use your homes equity as your down payment.  Generally, there are not any fees to get into a Home Equity Line of Credit.  Depending on your overall cash flow you can pay the HELOC down in a short period of time and use it again for another purchase.

As a fannie/freddie lender I would use the 401K as your reserves for when you are buying more properties (doors) unless you have liquid cash somewhere else that you can point to.

Would love to know more about your current situation in order to give you more feedback on how I would tell you to build your strategy to purchase more properties.  Feel free to DM me if you want to connect.

Tim

Julie Dillon · Answer

I didn't consider factoring the penalty from withdrawing into the ROI.  Good catch!

Tyler Weaver · Answer

I was much further from retirement age and cashed out some of my IRA. The way I looked at it, I deferred income from a year where my marginal tax rate was quite high, to one where it was close to zero.  The funds from my IRA were taxed at something pretty close to a total of 10% from the penalty as opposed to the 27-35% tax rate of the years when I was stocking away the money.

I do not have experience on the other side of things. I looked into lending to myself at market rates, which seemed appealing, and doing deals from a self directed IRA where I would have to make sure it was 100% disconnected from me, and the IRA was the only one benefitting.  This seemed a bit challenging for long term buy and hold, but maybe worth it on buy and holds.

401k borrow or withdrawal/ cash-out?

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