Can I pull my 401k to buy an investment property w out penalty?

[Sean Robles]

Need help on how to get into rental property w 25k

[Dmitriy Fomichenko]

@Sean Robles,

When you take distribution from your 401k you will have to pay taxes on the distribution amount (assuming this is tax-deferred account, not Roth). In addition to this if distribution is taken prior to normal retirement age - you would have to pay penalties. There is no way to avoid this.

You can also set-up a self-directed IRA, do a direct rollover from your 401k to SD IRA and then invest in alternative assets with your SD IRA. But keep in mind the property would be owned by the IRA, not by you personally. All income must go into the IRA, and all expenses must be paid by the IRA.

You can use leverage when buying rental in an IRA, but the loan must be non-recourse since you are considered to be "disqualified person" to your IRA and therefore not allowed to provide a personal guarantee. Here is a list of lenders offering such financing:

https://www.biggerpockets.com/blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k

When you use leverage inside of an IRA that would create Unrelated Debt Financed Income, which would be subject to UBIT tax. Make sure you understand the numbers. Self-directed Solo 401k on the other hand is exempt from UBIT on leveraged real estate, therefore if you qualify this would be superior option to consider.