Anyone ever cash in their 401ks to buy real estate?

Question

I built a sizable real estate portfolio cash flowing about 5100 a month. I want to know if anyone in here ever cashed in their IRA/401k's--- took the penalty and invested in real estate cash flow?

Marshall Mok · Answer

I borrowed form my 401k for a down payment. Its great since all of the interest goes right back to your 401k.

Jill F. · Answer

We did. My husband is over 60 so we don't have an early withdrawal penalty. We still have to pay the taxes though.

Kerry Baird · Answer

I cashed out my IRA to buy a house.  Took the penalty, and didn’t worry my pretty head about it.

I prefer adding value to my properties, and I can’t do that with stocks.

Jim D. · Answer

I've considered similar ideas - I've built a great 401k and now I look at it and say to myself, perhaps I could withdraw it and take all the penalties and pay all the taxes...... then still have enough to pay off a couple properties, buy a couple more, and retire.  The self-directed IRA may be great for some, but the problem is, the funds are still in an IRA.  Doesn't help me retire early.

But don't get me wrong, I'm not going to do it.  No way I pay those penalties and taxes all in one shot.  I am very likely to use 72(t) SEPP as @Justin Windham suggests.  This will provide the cash flow without the penalties and all-at-once tax hit, and I can still invest it in more properties and/or mortgage paydown, and hopefully arrive at a similar early retirement.

Charles Kao · Answer

@Marty Summers It depends on the size of your 401k, but investing in real estate directly through you 401k is kind of a pain because you are investing with tax deference but that's one of the reasons to invest in real estate because of all the writeoffs.  In general I wouldn't advise someone to take the penalty, but consider a Solo401k.  With a Solo401k you have a loan feature which caps at 50k, and you can also get nonrecourse loans off of 50-65% of your retirement balance while still continuing to invest it in your usual retirement funds.  I use @Justin Windham for my Solo401k and it turned out wonderfully.

George Blower · Answer

@Marty Summers

Of course, if you take a distribution from your retirement account you will have to pay the taxes and (likely) penalties.

There are possible alternatives which would allow to you use these funds without paying taxes or penalties.

• First, you may wish to consider transferring the funds to a self-directed 401k or IRA which will allow you to invest in real estate without incurring taxes or penalties. Please see additional considerations below.
• If you are eligible to set up a self-employed Solo 401k (or have a 401k plan through an employer which accepts rollover contributions and allows for 401k participant loans), another alternative which would avoid taxes and penalties would be to transfer your funds to such a 401k plan and then take a 401k participant loan.  Please see additional considerations below.

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Solo 401k vs. Self-directed 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.

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).

Ruthie Johnson · Answer

I moved mine to a self-directed IRA, so no penalty to invest in whatever I choose. Returns go directly to the IRA, but IRA will also pay for any repair or project costs, without penalty.

Richard Weinberg · Answer

@Marty Summers

Unlikely that will make sense. Try to use it as collateral and borrow against it.

Good luck.

Shadonna N. · Answer

@Marty Summers interesting thought.  I don't know if the restrictions are there to protect the consumer.  I think the limit is now 19K.  If you invest after tax dollars and withdraw the funds early you should not be taxed again.

Marty Summers · Answer

@Shadonna N.  Thanks!  You know, the more I read this thread, the more I realize there was no benefit in having pre-tax dollars directed at a stock market that is in another bubble.  Another goverment lock-down situation.  Too many rules...etc.  can't invest more than 17k per year and can't take it out without some stupid penalty.  Go figure!  Socialism as far as I'm concerned...

Anyone ever cash in their 401ks to buy real estate?

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