401(k) Withdrawal for Real Estate Investing

[Gabriel Starr]

We've all seen the models and read the thousands of articles that say not to touch your 401(k) until you need to in retirement. However, we also don't have a lot of control of how that money is invested and the accounts gets hit with management fees each quarter regardless of how it performs.

I am considering cashing out my 401(k) most of which is a ROTH 401(k) to purchase more real estate. I own a duplex (live in one side and rent the other) and I almost live rent free. I've seen much more advantages and bigger returns from my small down payment on my duplex than I ever have in my 401(k). Between cash flow and tax advantages, I am seriously considering getting more aggressive with real estate.

Cashing out my 401(k) is something I would've never considered, even a year ago. But looking at projections of what my balance will be in 30 years versus cash flow and equity of real estate 30 years from now and I'll say I'm starting to believe that all the hype of the 401(k) is just so the financial institutions can hold on to your cash and leverage it instead of you doing it for yourself.

It is so ingrained in us to not touch our 401(k)s that I get sick when I think of it, until I look at what that money could do in real estate. Even with taking the 10% fee and paying taxes.

So, has anyone here done this?!

[Daniel Murphy]

@Gabriel Starr, I wouldn't say that 401k's are bad.  They're a good investment for the masses.  As a RE investor, you have to realize that we're a group that is comfortable thinking outside of the box & taking on more work & risk.  Yes, I believe that long-term RE investments will outperform. But it also comes with a cost of extra work & complexity.  

You mention that the 401k & investment have fees, so does RE.  Property taxes, insurance, repairs, software etc.  We just tend to mentally think of this stuff in a different way as they are not labeled "fees".  As humans, we're taught that "fees" are bad so our brain tends to process anything with the word "fees" differently than we would process "property tax".  

All that being said, if your 401k is mostly in Roth assets, your "cost" to withdraw it may be pretty minimal. You can withdraw your contributions out of a Roth IRA anytime tax free as a return of your basis. The gains are subject to a 10% IRS penalty & taxation. However, if you're talking about a Roth 401k (vs. a Roth IRA), you may not be able to withdraw the full amount of the assets. In a 401k, your technical term is called a "participant". IE, you're just participating in the plan that your employer setup. You only have a certain amount of control & options. Think of, you're riding a bus. You're a passenger. You can't do whatever you want, you have to do what the bus driver says & go where the bus driver drives.

Email your HR department & ask for your "summary plan description".  They are required by law to give this to you annually & it spells out all of the boring details about your plan. This is where it will tell you details about withdrawals, loans etc.