Should I Withdraw $60K From My Roth 401(k) to Expand My Real Estate Portfolio?

Question

I’m 28 and debating whether to withdraw $60K from my Roth 401(k) to help fund a new rental property. I know the tax hit isn’t ideal, but I’m wondering if the long-term cash flow benefits outweigh the opportunity cost. Would love to hear thoughts from others who have been in a similar situation!

In the next 5-10 years, I plan to leave my current industry and transition to real estate full-time, so I’m especially interested in how this could impact that goal.

Current Financials

Roth 401(k) Balance: $105K

• Contributions: $79K
• Earnings: $23.5K
• Salary: $109K
• Contributing 6% annually ($545/month), with a 100% match for the first 3%Investment Growth Assumption: 8% per yearCurrent Rental Cash Flow (Pure Profit After All Expenses): $7,500/month (9 units)Potential New Property Cash Flow (Pure Profit After All Expenses): $1,300/monthCurrent Real Estate Portfolio Value: $1.4MAfter New Property: $1.7M
• 
• Contributing 6% annually ($545/month), with a 100% match for the first 3%
• Investment Growth Assumption: 8% per year
• Current Rental Cash Flow (Pure Profit After All Expenses): $7,500/month (9 units)
• Potential New Property Cash Flow (Pure Profit After All Expenses): $1,300/month
• Current Real Estate Portfolio Value: $1.4M
• After New Property: $1.7M

• 
• Contributing 6% annually ($545/month), with a 100% match for the first 3%
• Investment Growth Assumption: 8% per year
• Current Rental Cash Flow (Pure Profit After All Expenses): $7,500/month (9 units)
• Potential New Property Cash Flow (Pure Profit After All Expenses): $1,300/month
• Current Real Estate Portfolio Value: $1.4M
• After New Property: $1.7M

Withdrawal Breakdown ($60K)

• Tax-Free Contributions: $45K
• Taxed Earnings: $13.4K

Why Only $13.4K Is Taxed and Penalized

My Roth 401(k) balance is made up of:

• Total Balance: $105KContributions: $79K (75.24% of total)Earnings: $23.5K (22.38% of total)
• Contributions: $79K (75.24% of total)
• Earnings: $23.5K (22.38% of total)

• Contributions: $79K (75.24% of total)
• Earnings: $23.5K (22.38% of total)

When withdrawing, the money comes out proportionally from contributions and earnings. So, if I withdraw $60K, about 75.24% of that should come from contributions (since that’s how my balance is structured).

• 75.24% of $60K = $45,014 → Comes from contributions (no tax or penalty)
• 22.38% of $60K = $13,428 → Comes from earnings (subject to taxes & penalty)

Taxes & Penalty on the Earnings Portion ($13.4K)

• Federal Income Tax (24%) → $3,219
• Early Withdrawal Penalty (10%) → $1,342
• Total Tax & Penalty: $4,562
• Net Cash After Taxes and Penalty Fee: $55,437

The Dilemma

If I leave the money in my Roth 401(k), continue contributing $525/month, and earn 8% annually, my balance could grow to:

• $229,865 in 10 years
• $606,905 in 20 years

But if I buy the property, it could generate $15.6K/year in pure cash flow, plus appreciation. Since I’m holding these properties for the long term (30-year loans), I’ll have fully paid-off assets around the same time I’d traditionally start withdrawing from my 401(k). Additionally, I’ll have the ability to pull equity out in the future to keep expanding my portfolio.

Given my growing real estate holdings, should I even worry about my Roth 401(k)? Or should I focus entirely on building cash flow and leveraging real estate?

TL;DR:I’m 28 and considering withdrawing $60K from my Roth 401(k) to fund a new rental property. I currently have a $1.4M real estate portfolio and expect to reach $1.7M after buying this new property, generating $7,500/month in pure cash flow. I’m contributing 6% of my $109K salary to my Roth 401(k) and plan to transition to real estate full-time in 5-10 years.

Dominic M. · Answer

A second option you might not have considered is self directing your 401k. Many companies out there that can facilitate this. Feel free to reach out if you have any questions.

Robere Istatia · Answer

I agree with @Isadore Nelson, there will be an initial sting due to to the IRA transaction but with quick math at 8% your 60k will generate about 4.8k in year one, in 4 months at 1.3k you've already eclipsed that, their will also be a larger tax for passive income and an initial penalty from the IRS, but it won't erode the 8 month difference let alone the yearly compounding effect. With time hopefully the numbers will be even more in your favor with appreciation of the property and you will have cash flow to continue to invest, also it is building equity in your portfolio that you may want to tap for opportunities in the future. Roth IRA's are one investment tool but they are not that aggressive, real estate is a lot more aggressive but it also comes with more risk than a Roth. I would also recommend talking it over with a RE professional in your area to make sure the comps for profit are accurate because it could swing a lot with different profit projections. Great job with the portfolio you've already built.

Isadore Nelson · Answer

Hey Mordecai,

Sounds like you’re in a great spot with your real estate portfolio already! In terms of the Roth 401(k) withdrawal, here’s my take:

First off, that $60K withdrawal might sting a bit with the tax hit, but if you’re using it to buy a property that gives you solid cash flow ($1,300/month), it might make sense in the long run. That $15.6K/year in profit from the new property adds up, especially when you factor in potential appreciation over time.

As far as the Roth 401(k) goes, the growth potential is nice, but it’s not going to generate the same kind of passive income you’re going to see with real estate. You already have a pretty solid portfolio, so adding another property and generating more cash flow might accelerate your wealth in a way that the Roth can’t match, especially if you’re planning to transition to real estate full-time soon.

The long-term game for you seems to be building that cash flow and equity in real estate, and it sounds like taking the hit on the Roth 401(k) could be worth it for the immediate returns. Plus, as you mentioned, you could always tap into the equity later on to continue expanding.

At the end of the day, it’s about what fits best with your goals. If you’re focused on cash flow now and building real estate wealth, it seems like pulling from the Roth could make sense. But definitely consider chatting with a financial advisor who knows real estate—they can help run the numbers for you.

Hope that helps, and good luck!

Kyle Luman · Answer

I'm kind of more on the conservative side of things, so I would lean towards trying to leave that Roth money in a Roth situation.  It can be so powerful moving forward.  I would look into self directed 401(k) options (your employer may not allow that) or the borrowing from the 401(k) to see if you can have your cake and eat it too!  I believe my employer allows up to $50,000 loan from our 401(k).

Another option could be to look for a partner to bring the money.

Mordecai Ese · Answer

@Chris Seveney Hi chris, this is in the San Antonio market

Chris Seveney · Answer

So if I understand this your saying with $60k investment you can cashflow $1300/month after expenses? Where are you investing.

Estela Legaspy · Answer

Can you borrow from it? I did with with mine and pay myself back interest included but I don't if that's an option your plans offers. I am losing on growing that money but I won't be penalized unless I leave this job. Then it's a taxable event if not paid within 90 days.

Mordecai Ese · Answer

Thank you!!

Should I Withdraw $60K From My Roth 401(k) to Expand My Real Estate Portfolio?

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