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!

[Nicholas L.]

@Daniel M.

100%, absolutely no.  The current market environment is such that your return can't possibly make up for the penalties and taxes you would pay.  Especially given that you say that you have a limited emergency fund.

[Chris Seveney]

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 agree with Nicholas. Pulling money from a retirement account and paying penalties is almost never a good idea. 

Where did you get (besides Chatgpt which is where your post was written) that conservatively real estate could more than double compared to retirement funds?

Historically real estate and markets are nearly identical over a long period of time. 

I also do not see how you are saying real estate has better tax benefits over  a retirement account. Retirement account taxes will be deferred for another 20+ years for year, real estate its depreciated but only deferred if you do a 1031 at sale. 

[Daniel M.]

@Nicholas L. and @Chris Seveney, I appreciate your viewpoints. My idea came after reading 401(k)aos by Andy Tanner. Tanner promotes creating personal retirement accounts through investments in assets that generate passive income, providing more control over one's financial future.

[Basit Siddiqi]

Withdrawal Scenarios:

• Scenario 1: Withdraw everything today at age 40, resulting in a 35% loss to penalties and taxes.

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.

[Jeff S.]

@Daniel M. you can think of your retirement accounts as an emergency fund whereas in a real emergency and with no other possibilities you could draw from. 

[Brett Synicky]

https://www.biggerpockets.com/member-blogs/2810/21298-solo-4...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!

 If you want to invest in real estate but don't have enough personal funds to do so, consider an SDIRA or Solo 401(k) if you qualify.  You can take advantage of the amazing returns real estate and other alternative assets can offer without having to pay all those taxes (now) and penalties.  Yeah you won't get the tax benefits that trickle down to your personal income but that's because in a retirement account there are NO taxes on the gains in a Roth or it's tax deferred in a traditional.  

Here's more info on both hope this helps.

Solo 401k

SDIRA

[Daniel M.]

@Basit Siddiqi, based on your experience, would you do it again?

@Brett Synicky, Thank you for the suggestion! SDIRA and Solo 401(k) sound like interesting options for investing in real estate through my retirement accounts. I’ll check out both articles you shared.

How do Solo 401(k) and SDIRA benefit W2 individuals in terms of contribution limits, investment flexibility, and tax advantages, particularly with features like checkbook control and Roth contributions? What are the advantages for investors looking to diversify into alternative assets like real estate, and how does it compare to traditional IRAs regarding custodian requirements and tax benefits?

[Basit Siddiqi]

Quote from @Daniel M.:

@Basit Siddiqi, based on your experience, would you do it again?

If I was confident in being able to make 10%+ return in real estate(Cash Flow + Appreciation), then yes.
I don't know if I would do it now since i am not sure I can make a 10%+ return in real estate given where interest rates are.

The reason I suggest 10% is because the stock market on average makes 8% annually.
The 2% annual difference will pay for the penalty over several years.

[Kellie Griffith]

Instead of cashing out your IRA with the consequences of penalties and taxes, keep your money in your IRA and use it to invest.

[Brett Synicky]

Quote from @Daniel M.:

@Basit Siddiqi, based on your experience, would you do it again?

@Brett Synicky, Thank you for the suggestion! SDIRA and Solo 401(k) sound like interesting options for investing in real estate through my retirement accounts. I’ll check out both articles you shared.

How do Solo 401(k) and SDIRA benefit W2 individuals in terms of contribution limits, investment flexibility, and tax advantages, particularly with features like checkbook control and Roth contributions? What are the advantages for investors looking to diversify into alternative assets like real estate, and how does it compare to traditional IRAs regarding custodian requirements and tax benefits?

SDIRA contribution limits are the same as any IRA, $7k or $8k over 50, annually. No impact whatsoever on w-2. Roth IRA/SDIRA has income limitations, you can check IRS/CPA for current guidelines on that.

Solo 401(k) may work if you're self employed and have no full time employees other than you/spouse or even if you're in a partnership situation.  The impact on w-2 happens if you're contributing to an employee sponsored 401k plan with that employer.  There are 2 hats you wear when self employed.   Employee and Employer (business owner).  As an "employee" with a solo 401k you can contribute up to 100% of your S/E earnings up to $23k/$30,500 over 50).  You cannot double dip on the employee contribution. For ex you're putting $10k in at your employer then you could only put in an additional $13k into your Solo 401K.  Additionally you can contribute 20-25% depending on the situation of what you pay yourself or the gp of the company which is commonly called profit sharing, which you don't have at your w-2 job and your w-2 job has no impact on this.  The total cannot exceed $69k or $76,500 over 50. 

You can invest in anything except the following:  Life insurance (SDIRA only) and for both collectables and disqualified parties/prohibited transactions.

Not all providers will offer checkbook control as an option in which case you'll need to go through the custodian for all transactions.  

Regarding your tax benefits question, certainly something to discuss with your tax advisor, but here's a few thoughts.  Employee contribution can be done as Roth or traditional or combo.  Employer profit sharing contribution is pre-tax and a business expense for the business.  You can do a Roth conversion if you'd like.  

From an investment perspective, there's nothing wrong with the stock market but if you invest properly into real estate or even private lending in your retirement account you can get a much higher return than 8%.  There are no taxes to worry about until distribution (pre-tax) and no taxes at all on the gains in the Roth.  You can get a non-recourse loan and leverage your funds to buy 2 rentals instead of 1.  Last I checked nobody will loan you money to invest in the S&P 500.  

There's more to this but that's a lot, hope it all makes sense.

[Michael Byers]

I love that you are thinking outside of the box. So many people against this idea haven't thought it out completely and they don't realize that everybody's situation is very different. It's just switching out one retirement vehicle for another, and you have to do what's right for you. You pay taxes on 401k withdrawals whether you are 40 or 60, so the 10% penalty you get is what you have to factor in with your decision.

It's impossible to say whether stocks/bonds in your 401k or real estate that you acquire will do better over the long haul. If you hustle and you are passionate about real estate investing my gut tells me that you will have more wealth in the long run from real estate. 

Have you considered only taking a portion of your 401k out? Most administrators will allow you to take out chunks at a time. "Chunking out" can be a good strategy to spread out your tax burden over several years. 

Can you pull a line of credit on one of your properties to use as an emergency fund? 

Best of luck to you!

[Jeff Schemmel]

@Daniel M. take a close look at your 401k plan's language around "loans". Many 401k plans offer a loan option for a real estate purchase if you plan to live in it. You still have to pay it back, of course, and typically with a small amount of interest but at least you're paying yourself back. Read about what happens if you default on that. The 401k I used to have said if I default it didn't negatively affect my credit, but that it would become a taxable event like a withdrawal (come tax season) and I would have to pay penalties for the amount I had remaining. I know you're asking about 75% LTV and non-owner occupying so perhaps this is not that applicable, but considering a househack might not be out of the question.

[John Morgan]

@Daniel M.

100% yes. Do it. And now is a good time because the stock market is at its peak just about. Eat the 10% tax penalty and get the duplexes that will create generational wealth.

My plan doesn’t allow me to cash it out before 59 1/2 unfortunately. Even if I pay the 10% penalty for early withdrawal. So double check with your plan before you make an offer. Luckily my cash offer to buy a house was outbid and I didn’t get the property I made an offer on. lol

I have taken five 401k loans up to 50k to buy houses. Don't rule that out if you need just 50k at a clip to buy properties as well. It's better than nothing so I keep using my 401k like an ATM if I need 50k to scale up. Then pay it back asap with cash flow and repeat. I have 29 SFR and crushing it in RE compared to my 401k over the years. And my 401k returns were 50% in the last 12 months which is really high for a one year return. But my internal returns on my rental houses is much higher than 50% when you factor in leveraging a 20% down payment. My 20% down payment CoC is much higher than my 25-50% stock market returns after just a few years holding a rental house. In some cases it's over 100-120% when you consider 5% annual appreciation or more on the property, principal pay down (my tenant is paying down) and cash flow. I have at least 10 houses where my internal rate of returns are over 100% ROI after 3-5 years. Leverage allows this ridiculous high return. 401ks don't. Over time, your RE will produce WAY more wealth than your 401k. Not to mention it's all tax free money you can spend today due to the tax code. You'll have to pay taxes on your 401k eventually. So I say go for it and pay that 10% early penalty withdrawal fee and build generational wealth with RE. Good luck!

[Nicholas L.]

@John Morgan

Your advice is usually good but did you read OP's whole post?  He doesn't even have an emergency fund.

If he buys random duplexes with a 7% interest rate he's going to lose money on them and go backwards.

[Daniel M.]

I understand your concerns about not having an emergency fund, and I know his options can be polarizing, but Grant Cardone's perspective on financial management suggests, "Don’t save to save. Save to invest." This approach involves actively investing money to generate returns instead of letting it sit idle, potentially offering a more dynamic and rewarding financial strategy.

Cardone also emphasizes, "Cash flow is king. Cash gets burned. Cash flow sustains you." By investing, you can create multiple income streams that not only cover unexpected expenses but also give you a sense of control and empowerment over your financial situation. As he says, "Money that isn’t working for you is lazy money."

As Cardone suggests, the key is to shift from a mindset of saving for emergencies to creating multiple income flows. This approach, which might offer a more dynamic and potentially rewarding financial strategy, fundamentally differs from the "save an emergency fund" mentality.

[Jeremy H.]

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.
• ***What does significant mean? Means different things to different people - are we talking 300k or 3mm?
• Additional funds in a taxable brokerage account. 
• ***I think diversity in investments is a good thing
• Age: 40, with a relatively high effective tax rate. *** What does "relatively high" mean?
• Limited emergency fund.

Existing Duplex:

• Mortgage with a 75% LTV ratio and a high interest rate.
• Modest annual cash flow. 
• ***What does "modest" mean? What's your ROI? How much appreciation a year? Are you able to take tax deductions or do you have to pass them forward due to income limitations? Are you or your spouse a REP?

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. 
• ***These outcomes are so vague it tells us nothing. Can you quantify any of these? You quantify losses due to withdrawing your 401k - then you leave the real estate investing completely vague. Huge red flag.

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. 
• ***Any numbers to quantify these scenarios? I don't see how RE investing doubles or triples the value compared to leaving funds in a retirement account - probability says that won't happen. Where's your worst case scenario? 

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. 

***Can you prove, with numbers on deals you have done in the past that you are currently surpassing those in your retirement accounts? Are there any numbers or proof to these claims?  

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 think this is a horrible idea personally. 

Withdraw your 401k, pay income tax, pay tax penalty, lose opportunity of compounding interest etc - you're taking a huge L out of the gate here 

Do you have a track record of success? When did you start RE investing? Why would you need to withdraw your entire 401k for downpayments on two duplexes? 

Do you have a plan to capture equity at the buy? Not discussed enough - even if I don't get great cash flow I'm capturing 15-25% equity at the buy (increasing net worth on paper). I didn't see you bring up this point - just the same regurgitated - cash flow (much harder and lower today than previous years), appreciation (going to keep you up with inflation unless you're "lucky" and bought in a great area), loan paydown (takes 20 years for significant paydown) and tax benefits (if you make 150k plus there's a good chance you're going to be passing these on) 

Why wouldn't you use your taxable brokerage instead and just pay the capital gains and reset the cost basis? As opposed to using your 401k and paying all kinds of penalties? 

"Limited" emergency fund? What does "limited" mean - 2k? 20k? 200k? 

Don't get me wrong, I like RE investing a lot and I think there's a place for it. But I am sensing major inexperience, lack of due diligence and just a bunch of red flags in general. 

The only way I could see withdrawing a 401k would be on a commercial deal where you can develop the land and increase the equity through revenue

[John Morgan]

@Nicholas L.

He said he has a limited emergency fund. I have over 5 million in rentals and have a limited emergency fund. I’d rather put my cash to use and buy more properties vs it getting devalued in my savings account doing nothing for me. So I’m ok having limited emergency funds. Maybe he is too. I can tap money for random cap ex things from 0% interest for a year cc loans, 401k loans and lines of credits at two banks for up to 75k if needed. Maybe he could tuck 30 or 40k of his money he cashes out from his 401k if he feels like he needs a big emergency fund. I don’t know what his plan for emergency funds is. But I do know I can make way more in RE over time vs my 401k due to RE being a multidimensional asset which performs equities over time. I feel like it’s worth the 10% penalty he will take for his early 401k withdrawal make much more over time with RE if he buys good cash flowing properties with leverage.

[Todd Goedeke]

@ Daniel m

@Daniel M.it's easy to qualify for a Solo401k .if you have large amounts of IRA or old 401ks to transfer to aSolo401k it would make sense to open a Solo401k vs an IRA for RE investing.

Start self employment as an Uber driver on a very limited basis. That qualifies for opening a Solo401k.

[Nicholas L.]

@John Morgan

all good points and I think we actually mostly agree. I'm with you in that I also keep a limited amount in cash because I have lots of assets I could tap if I had to - HELOC, brokerage, etc.

I just think new investors are having a really, really tough time buying properties that cash flow right now.   they keep doing this:

https://www.biggerpockets.com/forums/48/topics/1201707-drown...

and this:

https://www.biggerpockets.com/forums/48/topics/1137397-balti...

and this:

https://www.biggerpockets.com/forums/48/topics/1160450-run-i...

[Logan Winn]

While I do not want to give you financial advice I personally would caution against cashing out my 401(k) and IRA funds to invest in real estate, despite the potential for higher returns. There are options to take a loan against your 401k which I had success with but profit margins after tax were not worth the hassle of the project. While your analysis shows promising projections, there are several critical factors to consider:

Tax Implications and Penalties

Withdrawing from your retirement accounts at age 40 would result in significant losses due to penalties and taxes. The 35% loss you mentioned is a substantial hit to your investment capital. This immediate reduction in your investment base would require even higher returns from your real estate investments to offset the loss.

Diversification and Risk Management

Your current strategy of having funds in 401(k), IRA, and a taxable brokerage account provides diversification. Liquidating these to focus heavily on real estate removes this safety net and exposes you to sector-specific risks. Real estate markets can be volatile and subject to local economic conditions, potentially putting all your eggs in one basket.

Liquidity Concerns

Real estate is an illiquid asset. With a limited emergency fund, you may find yourself in a difficult position if you need to access funds quickly. Retirement accounts, while penalized for early withdrawal, still offer more liquidity than real estate investments.

Alternative Strategies to Consider

1. Self-Directed IRA for Real Estate: Instead of withdrawing funds, consider setting up a self-directed IRA that allows you to invest in real estate within your retirement account. This maintains tax advantages while allowing real estate investment.

2. Home Equity Line of Credit (HELOC): If you have significant equity in your existing duplex, a HELOC could provide funds for further real estate investment without touching your retirement accounts.

3. 1031 Exchange: If you decide to sell your current duplex, a 1031 exchange could allow you to defer capital gains taxes and reinvest in larger properties.

4. Refinancing: With your current high-interest mortgage, refinancing could potentially free up cash flow for other investments or allow you to invest more in your taxable brokerage account.

5. Partnerships or Real Estate Crowdfunding: These options can allow you to invest in real estate with smaller amounts of capital, maintaining your retirement account integrity.

Conclusion

While your real estate investment projections are attractive, the risks and immediate losses from cashing out retirement accounts are significant. The conservative nature of retirement accounts serves a purpose – providing a stable foundation for your future.

Instead, I would:

1. Maintaining your retirement accounts intact.

2. Exploring alternative funding sources for real estate investments.

3. Gradually building your real estate portfolio without compromising your retirement security.

4. Consulting with a tax professional and financial advisor to create a comprehensive strategy that balances your real estate ambitions with long-term financial security.

Remember, successful real estate investing is about managing risk as much as seeking returns. Your current financial diversity is an asset, not a hindrance to your investment goals.

Hope this helps!

[Jeremiah Dunakin]

I’m not sure who your 401k plan is through. I also don’t know how much you are trying to get. That’s said I have taken a loan from vanguard on my 401k and it was the best decision I’ve ever made. The loan process was easier than ordering a pizza online. No credit check no asking what loan was for nothing. I put in how much I wanted how long to pay back up to 5 years and where to send it. In a couple days it hit my account. I pay back payments from paycheck that is reinvested. All interest is paid back to me. There is a couple small fees. Before ot is said about potential loss on stocks cashed in. I took my loan and the bottom fell out in market. I’m not a genius but lucky. So I loaned out high and and bought back in low. I’m not saying it’s for everyone. What I am saying in my situation I will make way more from a single loan than I ever will from the 25k I took as a loan. It has allowed me to buy my first rental and that will allow me to buy another one and so on and so on.that was my experience best wishes

[Peter W.]

I personally wouldn't/didn't do this because I like stocks as an investment and I like my retirement accounts, but you do you.  I also don't believe you'll get returns good enough to deal with the costs associated with pulling your money out and the work involved (but maybe you will, I can't pencil in deals in my neighborhood where this would make sense). 

If you are going to do it, there are three ways to do it

1.) Pull the money out and pay penalties.
2.) Move your money into a self directed IRA and use the IRA to buy real estate. @Brett Synicky covered that in his post above.
3.) Use a 401k loan to cover the down payment on the next property.  Downside here is you have to pay your 401k back and are limited to the lesser of 50k or half the market value of your 401k.

In either of these scenarios, I think you need to evaluate the details as a whole with numbers.  The proposed real estate investment is too broad for you to compare returns between the two, what is the purchase price, what kind of repairs do you need, what kind of rent are you going to get, what is a good estimate for appreciation on the deal.  The large tech stock reliably get 15%ROE (which means we expect their long term performance to be 15% or so).  Are you going to get returns which are significantly better than that and do you have a strategy and skill set for achieving it?  

You also mention real estate as a passive activity?  If you have a good team it's semipassive, but not the way the mutual/index funds in your 401k are which are set and forget until 59.5.

The other thing to consider is that 401ks and IRA provide really good tax and liability benefits. If you go bankrupt, you get to keep your 401k--which also means people can't sue you for what's inside of them. The only real knock I've ever seen against the 401k is that you can't save enough in them to get wealthy.

Good luck Daniel

[David Luria]

Or...you could talk to an attorney and start your own C Corp (for investing in real estate) and then roll over your 401k via a ROBS (roll over for business something).  

your corporation then becomes the plan sponsor and chooses to fund from your retirement money. No penalties. No taxes.

You will just need to decide where you get the highest rate of return....your 401k or your real estate investments. Talk to a lawyer. I am not giving legal or investment advice. Just sharing what I have learned in my research.

[Todd Goedeke]

@David Luria ROBS stands for Rollover as Business Startup. It allows people to buy a business with funds from an existing 401k or Solo 401k in a tax free manner within the plan.

The money has to be transferred from an IRA to a 401k or Solo 401k that allows ROBS transactions. You need to be self employed to be able to set up either type of plan.

Unless you are buying a real estate company( no reason to if buying a single property) ROBS can t be used.

You don t need ROBS to buy RE in a Solo401k. Simply put, just buy the RE in the name of the Solo 401k.

I am not a tax atty. or giving tax advice. Visit tax atty. and company founder Adam Bergman of IRA Financial Group for info on ROBS and Solo401ks. He has a You Tube channel with many informative videos detailing self directed IRAs and Solo 401ks. There is no question regarding those topics he can t answer.

[Crystal Smith]

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!

This may not be possible but to avoid the taxes associated with taking the $ out of your 401K I'd check the rules with your provider and potentially an accountant to see if there's any way for you to roll the $ from your 401K to s Self Directed IRA.  Then use the Self Directed IRA to invest in whatever, real estate, stock market......   This is what my partner did.  There's no limit for a roll over.  The contribution limit is the same as any IRA.

Another thing to consider to avoid the taxes is to borrow from your 401K.