Invest in 401K then withdraw to earn while saving --- a plan

[Garrett F Anderson]

Hello!  

So I am recently starting a career as an analyst and I need to start making decisions as far as my 401K is concerned.  I have this idea that I'm not sure is good/ bad or allowed with 401K's.  I will explain my two options below.  Keep in mind I would like to use this money to invest in real estate within 3-5 years, this would be a post-tax 401K (for option 1), and I want to avoid withdraw penalties.

Option 1:

My company matches 6% of my contributions to my 401K.  I would match the 6%.  At this same time I would be living frugally and saving money, let's say $5000 a year.  I could deposit this $5000 into my 401K and earn a return until I'm ready to take it out.  Then, after 3-5 years I withdraw my money + earnings and invest it into multi-family units.  

Option 2:

I would still match the 6% but now I would just keep the $5000/ year in a savings account.  I would also choose a pre-tax 401K so I will be taxed less every year.  This way I have the money when I'm ready and there are no added fees.

My questions are: Is option 1 possible?  Can I deposit and withdraw in my 401K at will without withdrawal fees?

Also, would it be smarter to do the post-tax 401K while I'm not making a large income or do a pre-tax 401K and have a smaller income to be taxed?

If this doesn't make sense or there is a better idea, please feel free to let me know.

Thanks for reading!

[Jacob Sampson]

Option 1 - If you withdraw from 401k you will be charged taxes plus a penalty. I think it is around 10%. If you did a ROTH IRA you could withdraw basis with no penalty. But you would be putting your money in somewhere near the top of the market so would likely lose some of your principal for a time.

If you are in the 15% tax bracket or lower it makes sense to pay taxes now so you would do the ROTH 401k.  IMO.

I think you should get the full match and leave that money alone.  Then save what you can and build up cash to invest in real estate.  I think Option 2 is the best move for you.  Assuming a part of option 2 is that you leave that money alone.