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!

[Alan F.]

Quote from @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!

I'm not trying to be rude but, I think it's a bad idea. All math and books aside (I love math & books) REI is about the furthest thing from a W2 job. Heck starting your own small business is more likely to succeed. W2 employment prioritizes security, most forms of full time REI are are trapeze acts without a net. If you're going to get into REI just start with the hard work and grow it organically, you know like a side job.

[Paul Novak]

Quote from @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!

 I have used retirement funds for real estate to allow me to continue growing, specifically my 401K.  I wouldn't recommend this for most people but my real estate portfolio is going to be used for my retirement anyways so I see it as shifting funds from one retirement account to another.  I wouldn't do this to fund personal expenses or growing my lifestyle.  I didn't want to pay penalties or excess taxes so I took a loan out against my 401K.  I am not sure how much money you have in the account but the rules with my employer was that I could borrow 50% of the account value or $50K, which ever amount was smaller.  Because my account value is at $280K I could pull out the $50K.  The cost of me to do this was a one time fee of $75.  The terms were a 5 year loan at 8.25% but the interest gets paid back to my 401K so I keep the interest.  I paid it back by payroll deduction of $489 per paycheck coming off my check going to pay back the loan.  My wife and I have a solid income and good saving habits so we paid the loan back in 10 months.  Then I did it again for my next property.  We continue to alternate between doing this with my wife's account, pay it back, then do my account to continue scaling.  I am 39 with 4 properties.  This option has been working good for us and avoids penalties and taxes.  The opportunity costs are the reduction in cashflow from your paycheck while you payback the loan, and your 401K having stunted growth while the money is borrowed against it.  Not sure if this is an option that would work for you but it's something to consider.  If you have more questions feel free to reach back out to me.

[Jeremiah Dunakin]

Quote from @Paul Novak:

Quote from @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!

 I have used retirement funds for real estate to allow me to continue growing, specifically my 401K.  I wouldn't recommend this for most people but my real estate portfolio is going to be used for my retirement anyways so I see it as shifting funds from one retirement account to another.  I wouldn't do this to fund personal expenses or growing my lifestyle.  I didn't want to pay penalties or excess taxes so I took a loan out against my 401K.  I am not sure how much money you have in the account but the rules with my employer was that I could borrow 50% of the account value or $50K, which ever amount was smaller.  Because my account value is at $280K I could pull out the $50K.  The cost of me to do this was a one time fee of $75.  The terms were a 5 year loan at 8.25% but the interest gets paid back to my 401K so I keep the interest.  I paid it back by payroll deduction of $489 per paycheck coming off my check going to pay back the loan.  My wife and I have a solid income and good saving habits so we paid the loan back in 10 months.  Then I did it again for my next property.  We continue to alternate between doing this with my wife's account, pay it back, then do my account to continue scaling.  I am 39 with 4 properties.  This option has been working good for us and avoids penalties and taxes.  The opportunity costs are the reduction in cashflow from your paycheck while you payback the loan, and your 401K having stunted growth while the money is borrowed against it.  Not sure if this is an option that would work for you but it's something to consider.  If you have more questions feel free to reach back out to me.

I am taking same route Paul. I took roughly 25k to get first rental. Market just happened to tank after I took so I would have lost money anyways(I know it has rebounded). I will have 5 year loan payed back in roughly three years. After the loan is payed back I will have my 20% down payed backed. I will owe half on house then what it’s worth. Someone else is paying down my mortgage and I’m putting money in the bank every month. I am about to do it again in the fall. Best return I’ve ever gotten. Hope you continue to do well. 

This option is not for everyone. Tread lightly and make sure you can afford it.

[Daniel M.]

Thank you to everyone for your input! Here's the summary of opinions:

• Against: 7
• For: 4
• Neutral/Alternative: 5

My New Plan:

Instead of cashing out my IRA/401(k), I'm considering borrowing from my 401(k). Here's the breakdown:

• Loan Amount: $50,000 (max allowable amount)
• Interest Rate: 9.5% (interest goes back into the 401(k))
• Repayment: $524.24 twice a month over 60 months (max allowable time)
• Total Repayment: $62,908.67 (including $12,908.67 in interest)
• Fees: $75 setup fee + $6.25 quarterly fee (totaling $206.25)

Additionally, I have a taxable brokerage account with a modest capital gain and a tax rate of 15%.

Total Funds for Investment:

Combining the $50,000 loan with the funds from the brokerage account, I’ll have the down payment for another property.

I’m excited about this new plan and looking forward to your thoughts and advice!

[Todd Goedeke]

@Daniel M. check into transferring existing IRAs into a self directed IRA or Solo 401k( self employed) to invest along with the 401k loan monies. For example: you personally could have a 50% interest in a property and your ITA could own the other 50%.

[Paul Novak]

Quote from @Daniel M.:

Thank you to everyone for your input! Here's the summary of opinions:

• Against: 7
• For: 4
• Neutral/Alternative: 5

My New Plan:

Instead of cashing out my IRA/401(k), I'm considering borrowing from my 401(k). Here's the breakdown:

• Loan Amount: $50,000 (max allowable amount)
• Interest Rate: 9.5% (interest goes back into the 401(k))
• Repayment: $524.24 twice a month over 60 months (max allowable time)
• Total Repayment: $62,908.67 (including $12,908.67 in interest)
• Fees: $75 setup fee + $6.25 quarterly fee (totaling $206.25)

Additionally, I have a taxable brokerage account with a modest capital gain and a tax rate of 15%.

Total Funds for Investment:

Combining the $50,000 loan with the funds from the brokerage account, I’ll have the down payment for another property.

I’m excited about this new plan and looking forward to your thoughts and advice!

 Very cool Daniel!!!!  I am excited for you and hope all goes well.  As I stated this strategy has worked great for us I hope the same for you.

[Thomas Tsitouridis]

Try looking into a self directed IRA account. I did this and pulled 100% of funds from my Roth IRA and used the capital to expand in RE. Tax free. Money gets transferred to an entity that you manage and you can use the funds to grow your capital. You would not be able to pull funds to your personal name, as that would result in tax obligations.