Scottsdale, AZ · Member since 2016 · 62 posts · 8 votes
Hey guys, I'm a young investor and I currently have about 95% of my savings in my 401k. I no longer work for the employer I had the 401k with (if that even makes a difference, I don't know). But I really want to get started in REI and am considering using a portion of my 401k money to pay for the downpayment, repairs, etc on my first flip and maybe on my first rental as well... I'm scared of having to pay the 10% penalty I think may be associated with withdrawing my funds early...
-Is it worth it to go ahead and do it and bite the bullet on the early withdrawal penalty?
-Is there any way I can use my 401k money to finance my investment without paying the fee?
Thanks so much for your help! This BiggerPockets community rocks!!
Roll it into a self directed IRA. Then you can use that to buy. There are some important limitations, but no 10% off the top and income tax penalty. Search for SDIRA as there is a ton of info here.
Roll it into a self directed IRA. Then you can use that to buy. There are some important limitations, but no 10% off the top and income tax penalty. Search for SDIRA as there is a ton of info here.
If your main mortgage lender has an IQ greater than like 95, then you can borrow against your 401k, and it will not be viewed by your lender as a loan OR impact your DTI.
You should look into a self directed IRA or - if you are self-employed in any way - a Solo 401k.
Such a plan would allow you to retain the tax-sheltered status of the retirement plan and diversify that plan into real estate. All transactions would be for the benefit of the plan and you could not draw income personally. It is a great way to take advantage of your tax-sheltered savings and invest in an asset class that can really generate solid returns.
Its all about what you want. I would pull the money and buy as many houses as I could. You will pay taxes on the money some day anyway and you can make the 10% penalty back when you buy your first property if you find a good deal. You have lots of options. It just depends on what you want in the end and what type of deals you are doing. You make your money when you buy, not when you sell.
If you're trying to turn the the flipping of in real estate into your full-time job or one of your main jobs, then look into the ROBS 401k (Rollover as Business Startup) as it will allow you to use all of your retirement funds tax and penalty free to finance a real estate operating company provide a you are an employee of the business and therefore you can draw a fair salary.
Here is how the ROBS 401k structure works at a high level.
A new C-corporation is established.
Corporation sponsors a new 401k/PSP.
The IRA/ former employer 401k funds are transferred to a new brokerage account opened for the 401k/PSP.
The new Corporation issues stock shares to the 401k/PSP for the benefit of the 401k owner.
The 401k participant must be an employee of the Corporation business and he or she may take a reasonable salary.
To the extent that the corporation generates profits and elects to distribute those profits to the owners of the business, the percentage of the profits associated with the shares held in the 401k/PSP will flow back to the 401k/PSP brokerage account.
I thought you couldn't use a self-directed IRA for personal gain or indirect benefits (including using it to invest in your own or a relative's business). Wouldn't this violate that rule? (Unless you invested it in someone else's RE)
As I noted in my earlier post, all benefit would go to the plan.
My point was that if he was looking at using the old 401k he has, he could choose to leave that in a retirement plan and have the retirement plan be the investor in real estate. The IRA or 401k can invest in its own deals, and the IRA account holder can administer investments - just not for their own benefit personally.
The alternatives are an early distribution, which is not optimal.
The ROBS program that was mentioned is an option that allows the use of prior retirement funds to capitalize a business. That is a serious and complex venture for someone who wants to really focus on creating and running a significant business, and not just a "workaround" to be able to use IRA funds to flip houses and take an income.
Thanks @Brian Eastman I asked because I'm in the same boat and have been led to believe that my wife's self-directed IRA could not invest in properties my LLC in involved in. It would simplify my life if that were different =)
If it was me personally, I would go the same route as @Walker Seid however I am very anti-401k's so my opinion may be biased! I have two friends that took loans against their 401ks (up to $50,000). Then you will have monthly payments but technically, you are just paying yourself back. But the key is that it does not affect your Debt-to-income ratio.
But I'd say pull it out and start buying properties!!! Feel free to DM if you are interested in learning why I think 401k's are a bad idea
...I have been led to believe that my wife's self-directed IRA could not invest in properties my LLC in involved in. It would simplify my life if that were different =)
You are correct William, all of the transactions of a self-directed IRA must be arms-length, in other words the IRA can not have any dealings with a "disqualified person" or entity, but it can certainly invest on its own.