Seeking Advice on Using Retirement Funds for Real Estate Investment

[Daniel M.]

I'm considering cashing out my 401(k) and IRA funds to invest in more real estate and would appreciate any advice or insights on whether this idea is viable.

Current Financial Situation:

• Significant savings in 401(k) and IRA accounts.
• Additional funds in a taxable brokerage account.
• Age: 40, with a relatively high effective tax rate.
• Limited emergency fund.

Existing Duplex:

• Mortgage with a 75% LTV ratio and a high interest rate.
• Modest annual cash flow.

Withdrawal Scenarios:

• Scenario 1: Withdraw everything today at age 40, resulting in a 35% loss to penalties and taxes.
• Scenario 2: Withdraw at age 60 with growth scenarios ranging from 1.3x to 2.3x the initial balance.

Proposed Real Estate Investment:

• Purchase two additional duplexes with a 75% LTV and 6.635% interest rate on a 30-year term.
• Projected outcomes include appreciation, cash flow growth, loan amortization, and tax benefits.

Comparison of Real Estate vs. Retirement Accounts:

• Conservative estimates suggest real estate investment could more than double the value compared to leaving funds in retirement accounts.
• Best-case scenario projects nearly three times the value through appreciation, rental income, mortgage paydown, and tax benefits.

Conclusion: Investing retirement funds in real estate offers significant potential for financial growth and diversification. Despite risks, the projected returns surpass those of traditional retirement accounts.

Seeking Advice: I would like your advice on whether using my retirement funds for real estate investment is a good idea, considering the potential risks, returns, tax implications, and any alternative strategies.

Thank you for your help!

[Basit Siddiqi]

Based on the little information, I think you are under-estimated how much taxes / penalties will be taken out.

Your profile mentions you are a resident of Brooklyn which is located in NYC.
NYS / NYC taxes is taxed at around 10%+ for middle income earners
Penalty is 10% at the federal level
Federal taxes for middle income earners is 24%
Given the 3 numbers of 24% + 10% + 10%, you are closer to 44% instead of 35%
If you are above a middle income earner, the tax rates can behigher.

With that said, I took out all my retirement income and put it in real estate. This was about 8 years ago and the atmosphere for investing was much different. I personally would wait for a correction before exchanging the money.

Furthermore, if your real estate investments perform slightly more than real estate(1% to 5%), you can make up for the deferred return + penalties over a couple of years.