Pension and 401k Options

[Jonathan Doescher]

I have a pension and 401k from a company I just separated from. My goal is to make enough passive income to “retire” in my 40’s ( 7-10 years) My wife and I are still employed, but my wife no longer can work overtime.

We have money to invest in our first rental property, but should I use the Cares Act to pull money from my 401k without penalty and invest in more properties?

My pension plan was switched to a 4% annuity. Should I transfer it to an IRA or take a lump sum payout to invest in another rental? I would probably have to pay the 10% penalty for the lump sum payout, but I believe I could do a 72t down the road for Cashflow if I switched it to an IRA.

I realize some of this may push me into a higher tax bracket, but based on historically tax rates they are pretty reasonable right now. I am also not interested in going the route of a self directed IRA.

Thank you in advance for your insight!

[Scott Jensen]

@Jonathan Doescher 

In general, I don’t recommend new real estate investors withdraw funds from retirement accounts to fund deals or invest in real estate inside of their retirement accounts. The stock market has a long history of growth and until you have some personal experience in real estate investing you should be cautious with your retirement accounts.

I would suggest rolling the 401(k) funds into an IRA and doing annual Roth conversions each year to fill up the lower tax brackets. 5 years after you convert a portion of your IRA to a Roth it is counted as the "basis" and can be taken out of the account without any taxes or penalties. This will free up your retirement funds for penalty-free distributions before 59 ½. In 5 years, after you have some experience investing in real estate, you can decide whether it makes sense for you to use some of your retirement funds for real estate investing.

If I had a pension only earning 4% I would roll it into an IRA with my other investments (and maybe convert it to a Roth IRA.) 72t distributions are pretty restrictive and often times doing annual Roth conversions works out better.

I agree about tax rates being historically low right now. I would be cautious about deferring taxes in this environment.

My last point is that not everyone is eligible to take the Coronavirus related withdrawal. This article does a pretty good job of explaining who qualifies and who doesn’t.

https://www.cnbc.com/2020/06/19/irs-expands-eligibility-to-take-coronavirus-related-withdrawal-from-retirement-savings.html

I hope that helps. Best of luck!