Would like to fully withdraw from my 401K for REI.

Question

Account Closed · Answer

@Isaac Molina III

I would be very careful withdrawing money from retirement accounts to invest in real estate.  How much will you be taxed?  What is your return?  There are so many questions.  Be careful.

From your profile picture, it looks like you have a family.  Do you have enough cash reserves if your REI doesn't work out?  Consider your entire financial picture...

Sam Shueh · Answer

Risk tolerance on RE vs 401K.  Majority American investors took a head wind lost their safe heaven from 401K recently. You took tax consequence get into RE.  If you buy a 4 plex you have only 3 tenants, you lost 25% already. The RE market price was highest spring 2018. In general there will be no or little home appreciation in North America.

Talk to your CPA then Fidelity deciding what your move may be.

Gene Walker · Answer

What about rolling the money over to a check book IRA account?. I don't know the particulars of doing this maybe someone else has experience here.

Isaac Molina III · Answer

Thank you Basit and Karen for your response. Again, my employer has gone to a different 401K with a different company. The 401K, through Fidelity, has had nothing contributed by neither me nor my employer since we switched over to Vanguard In January of this year.

But these insights are great! Getting a loan against the account sounds like a valid option. Never really thought about that. Also, rolling the vested balance over sounds like a great idea as well.

Karen O. · Answer

The plan sounds like it's frozen.

In-service payouts may also not be allowed, possibly with hardship being the only exception.

The plan document will explain these things. You might be allowed to roll the vested balance into the new plan and that plan may have a loan option.  An HR Dept or plan administrator should be able to advise you.

The co may be planning to terminate the plan entirely since a frozen plan still has costs attached. If that's the case, at some point all the assets will be released either for rollover to the new plan or to an IRA A/C. Again speak to HR.  It may be some time to get all the parts in place.

In the meantime, you should continue to monitor your holding and rebalance or adjust investments as appropriate.

And should you change jobs, your separation will certainly allow for an asset transfer.

Good luck.

Basit Siddiqi · Answer

@Isaac Molina III

If you are still employed through your employer; there may be restrictions not allowing you to withdraw from the 401K.

The second thing you should look at is the vested and unvested portion. Normally, you would only be eligible to take out the vested portion.The next thing to consider is whether or not you should withdraw from the 401K. You have to understand that amount withdrawn would be subject to income tax plus penalties.You may want to consider taking a loan against your 401K(if your employer's 401K allows that option). I used a 401K loan to purchase my first investment property.Some things to consider if doing so - your future paychecks will be lowered to pay back the loan. Furthermore, you would be required to payback the loan in the event of being let go/quitting. otherwise, the remaining balance would be subject to income tax + penalties.

Frank S. · Answer

You could get a 401k loan, up 50k max or half of what you have if less than 100k. the terms are about 3 years for  personal needs, and 1 basis point higher than prime - paid to yourself.  You lose the tax advantage,  but that's the same with any loan.  Costs are usually very low.

Good luck

Isaac Molina III · Answer

To Aaron, I appreciate the concern. I’ve considered the risks in this route. I really am trying to figure out my options. I’ve taken funds out of my retirement account before to make a down payment on my first home. You’re right about the taxes, because the taxes I paid initially on the withdrawal was not enough so I got flagged later on; a lesson learned.

To Ray, that is correct; the account is employer matched, however, the employer no longer contributes to this account. Same goes for me, when I get paid, a portion of my salary contributes to a new 401K account that is employer matched. So the account in question has funds that are sitting idle. There have been no contributions since January of this year.

Ray Johnson · Answer

@Isaac Molina III Does the account contain any employer matched funds? This may be a part of why you can't withdraw all available funds?

If you can't withdraw all the funds maybe an option is to withdraw enough for a down payment on a property and use the balance that you can't withdraw as the required reserves needed for the bank underwriter to approve your loan. This is a strategy I use, every time the bank wants to see reserves for a new purchase, I just show them the latest statement from my 401K, you can repeat this process over and over never having to worry about the reserves.

Can you withdraw enough for just the purchase?