401K - to withdraw or not to withdraw

[Kevin Robertson]

I know this is somewhat off-topic, maybe there is a bigger pockets money forum that I just couldn’t quite locate?

The primary question I have for the community is, “ should I withdraw from my fully vested 401k early?”

I’m 27 and my wife and I’s goal is to be career missionaries outside of the U.S. as soon as financially possible. The primary reason we are not yet is due to a decently large amount of student debt we acquired in undergraduate (30K remaining). We want to be debt free as quickly as possible but also want to be wise with our money. 

My employer matches 100% on 401k contributions up to 3% of salary and the 50% on the next 2%. This is fully vested from day 1 and also transferable. 

As I see it my options are:

1. Contribute full 3-5% and transfer to mission agency when we get onto our career placing (agency we are going with pays salary and could roll into an IRA)

2. Contribute 3-5% with employer matching contributions, take penalties and use the lump sum to pay off remaining student debt when the numbers balance. Expediting becoming debt free and getting to career sooner. (This is what I want to do but I also think it might be unwise and shortsighted, talk me out of this if I need to be is basically what I’m asking.)

3. Don’t contribute and invest the money directly in something else (home, student debt directly, index funds) open to suggestions here! 

[George Blower]

@Kevin Robertson

I gather that the funds are in your current employer and you have confirmed that you can transfer the funds without leaving your job. If so, you may wish to consider investing your retirement funds in real estate via a self-directed 401k or IRA.

If you are self-employed with no full-time w-2 employees, you can set up a Solo 401k & rollover funds from a non-Roth IRA as a tax-free direct rollover and then invest in real estate.

Solo 401k vs. Self-directed IRA

A Solo 401k has several advantages as compared to a Self-Directed IRA including the following which specifically apply to your situation:

• Unlike a Self-directed IRA, you can have the account for the Solo 401k at a bank or brokerage that does not charge maintenance fees and where you will have checkbook control.
• Unlike a Self-directed IRA, if you use leverage (which must be non-recourse financing in either case) to acquire real estate with your Solo 401k the income will not be subject to Unrelated Debt Finance Income tax

General Considerations Re Investing Retirement Funds in Real Estate:

1. If you purchase via an IRA (as opposed to a 401k), you will need to open an IRA account at a specialty trust company which allows for investments in real estate. Unless you invest via an LLC owned by the IRA, you will not have checkbook control over the funds which means you need to run transactions (e.g. income, expenses, etc.) through the trust company who will need time to process the transactions and generally charge fees for each transaction. On the other hand, keep in mind that there are costs associated with maintaining an LLC (such as the $800 annual franchise tax in California).

2. If you are self-employed with no full-time employees, you can set up a Solo 401k through a 401k provider which allows for investing in real estate. In that case, you can simply have the account at a bank or brokerage where you will have direct checkbook control.

3. In either case, all of the income and expenses will need to flow in and out of the retirement account.

4. In either case and if you will you debt to acquire the real estate, it must be non-recourse financing. See more at the following link: https://www.biggerpockets.com/blogs/9552/70408-ira... If debt-financed real estate is acquired via an IRA, any income attributable to such investment will generally be subject to unrelated debt finance income tax.

5. In either case, you can't live on the property or otherwise use it for personal use.

6. In either case, you can't work on the property as it must be a passive investment (e.g. you must hire someone to fix the toilet and can't pay the expense with non-retirement funds).

7. In either case, you must purchase/sell real estate from/to an unrelated person and the real estate can't be titled in your name personally (e.g. in the case of the 401k, it would be titled in the name of the 401k and you would sign as trustee of the 401k).

8. In either case, you should verify that you are eligible to transfer the funds from your existing retirement account (e.g. if the funds are in your current employer 401k, you will likely not be able to transfer until you quit your job).