Would you liquidate your 401k to purchase your first property?
Rental Property Investor · Milwaukee, WI · Member since 2019 · 46 posts · 63 votes
Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?
Many 401k plans allow you to borrow up to 50% or $50k of the vested balance, whichever is less. I did that to fund the rehab for my first flip to generate some seed capital.
@Eric C. Really good advice right there thanks
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
@Justin Reyes
I wouldn’t do that. You’ll take an early withdrawal penalty plus pay income tax on it. Just think of that money as your “rainy day fund” or emergency fund. If you want to get into real estate you can raise money from an investor and be the sweat equity or get a hard money loan. Good luck!
Better to take a loan against it. And better to do that when the market takes a down turn. Rather than temporarily lose money,you can "pay yourself" interest back, once the project is done and sold (or refinanced) you can put it back in and hopefully the market has rebounded. The only good reason right now to cash out a 401k is to put it into a "back door" ROTH, since rates are tax rates are at their lowest right now, and will go up again in 5 years, but that is rather specific and at your age, probably better to just fully fund your Roth directly. and keep the 401k money as is.
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
I’ve been in your shoes, and I just rolled my old 401k into my new companies 401k. For your wife’s unless it is somewhere you don’t want to invest with I would leave that money where it is until she gets a different job and then roll it into that 401k.
I invest in my company's 401k and also do REI as well. It is two separate sets of investment vehicles. The whole simple saying of don't put your eggs in one basket rings true.
I put my money where my mouth is. Right now I’m 90% stocks and 10% and am slowly putting equally into both. Retirement and even cash flow takes time. It isn’t a short game. If that’s your goal go buy lottery tickets. ;)
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
I’ve been in your shoes, and I just rolled my old 401k into my new companies 401k. For your wife’s unless it is somewhere you don’t want to invest with I would leave that money where it is until she gets a different job and then roll it into that 401k.
I invest in my company's 401k and also do REI as well. It is two separate sets of investment vehicles. The whole simple saying of don't put your eggs in one basket rings true.
I put my money where my mouth is. Right now I’m 90% stocks and 10% and am slowly putting equally into both. Retirement and even cash flow takes time. It isn’t a short game. If that’s your goal go buy lottery tickets. ;)
Thank you for the response. I agree I am not trying to get rich over night, with a my 401k...but what I am trying to do is put it to work on a asset like a multi family duplex where I can rent my current home and house hack into a duplex with my 401k downpayment.....
your thought?
@Justin Reyes don't
Another of many votes "no" for flipping or business purposes.
Suggestion... If you want to do this for a "primary residence as future investment" check with your financial institution. Some allow first a time home buyers to take money out penalty free or with limited penalties. If this makes sense for you, than consider it and check out a duplex that you can hack. Benefits; you could get a mortgage on a duplex/2+-4 unit as a primary residence which is a lower rate, possibly take advantage of first time home buyer grants and you can hack your way into a NICE long term investment.
Food for thought...
Here is the thing, you do not have to liquidate your 401 K to buy income property, instead buy investment property in your 401 K. You will need a trustee. It is fairly simple really. The benefit of doing that is if you take the money out of the 401K and pay taxes on it, you will have about40% less to invest. There needs to more said more about this, for example there should also be a long term strategy in place to do things like: pay the taxes in case of death etc.
I would advise against it. Focus on building your real estate fund. You will get there.
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
You can't take a loan on a 401k from a former employer. I would roll the 401ks into IRAs and invest the proceeds in good mutual funds. Make sure to update the beneficiary info on the IRAs (a lot of people forget to do that, or don't make changes as their families grow).
If you liquidate the funds, expect to pay about a $6.5k penalty (assuming a 20% tax rate plus 10% early withdrawal penalty-- could be more if you're in a higher tax bracket). Another way to look at it-- you're paying a 30% penalty to access these funds. Personally, I'd prefer to get a side hustle/cut back on expenses and get the money to invest rather than pay that-- how long would it take you to earn $15k? In my area it wouldn't take long at all.
@Dillon Y. One of the best replies I've seen on this site
Some have said what do you do in retirement if you've used your 401k for investing in Real Estate?!!! I say: your Real Estate Investments become your 401k and pays you very well in your tired years... H E L L O 🤔
401ks are run and managed by people just as smart as anyone here, so if you are able to put emotions aside and run your numbers on your Real Estate deals, you can do very well with REI as a retirement plan.
Many have done it in the past and many will continue to do just that in the future even when we have flying cars, people always need a place to lay their heads!
Never liquidate your 401k early unless it's an absolute emergency or if you have a Roth and you're only taking out the principle (no penalty since you already paid taxes on that). Save for your down payment instead, it will be worth it.
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
You can't take a loan on a 401k from a former employer. I would roll the 401ks into IRAs and invest the proceeds in good mutual funds. Make sure to update the beneficiary info on the IRAs (a lot of people forget to do that, or don't make changes as their families grow).
If you liquidate the funds, expect to pay about a $6.5k penalty (assuming a 20% tax rate plus 10% early withdrawal penalty-- could be more if you're in a higher tax bracket). Another way to look at it-- you're paying a 30% penalty to access these funds. Personally, I'd prefer to get a side hustle/cut back on expenses and get the money to invest rather than pay that-- how long would it take you to earn $15k? In my area it wouldn't take long at all.
I kinda wanna cash them out and liquidate or invest with it. But your input makes sense too. My wife is a stay at home mom for our 1 year old.
So its basically me providing the income at 40k a year and I do side hustles which is handy man work on the weekends. Just started out 3 months ago bringing in $300 every Saturday so yea...
@Justin Reyes
I would pull out no more than 50% as a loan.. but understand the risks.. if you lose your job you will stand to have to pay the rest of that loan in full within a certain period of time.. the last time I did this it was the last day of my employment for that specific company that I had been working for.
education is key to make sure that you first contact them and see what your options are then go from there based on what you are willing to risk.
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
You can't take a loan on a 401k from a former employer. I would roll the 401ks into IRAs and invest the proceeds in good mutual funds. Make sure to update the beneficiary info on the IRAs (a lot of people forget to do that, or don't make changes as their families grow).
If you liquidate the funds, expect to pay about a $6.5k penalty (assuming a 20% tax rate plus 10% early withdrawal penalty-- could be more if you're in a higher tax bracket). Another way to look at it-- you're paying a 30% penalty to access these funds. Personally, I'd prefer to get a side hustle/cut back on expenses and get the money to invest rather than pay that-- how long would it take you to earn $15k? In my area it wouldn't take long at all.
I kinda wanna cash them out and liquidate or invest with it. But your input makes sense too. My wife is a stay at home mom for our 1 year old.
So its basically me providing the income at 40k a year and I do side hustles which is handy man work on the weekends. Just started out 3 months ago bringing in $300 every Saturday so yea...
You're braver than me. With that income and a one year old at home I couldn't even think about rental property investing unless I had $10k in the bank for emergencies.
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
I’ve been in your shoes, and I just rolled my old 401k into my new companies 401k. For your wife’s unless it is somewhere you don’t want to invest with I would leave that money where it is until she gets a different job and then roll it into that 401k.
I invest in my company's 401k and also do REI as well. It is two separate sets of investment vehicles. The whole simple saying of don't put your eggs in one basket rings true.
I put my money where my mouth is. Right now I’m 90% stocks and 10% and am slowly putting equally into both. Retirement and even cash flow takes time. It isn’t a short game. If that’s your goal go buy lottery tickets. ;)
Thank you for the response. I agree I am not trying to get rich over night, with a my 401k...but what I am trying to do is put it to work on a asset like a multi family duplex where I can rent my current home and house hack into a duplex with my 401k downpayment.....
your thought?
If you want to invest in real estate make a plan. You made a plan to invest in your 401k don’t abandon it because you found a new investment vehicle. I recommend doing the minimum into your 401k to get the matching from the company and make a plan to save money outside of your 401k in just a simple savings account to build up money for a downpayment. Use the time it will take to learn from books, podcasts, and anything else you can use to learn. Then start looking and finding where you want to invest and learn that market. It will take a year or two, nothing is fast in buy and hold, to save the money and find the right property. From when I first wanted to buy a property and when I closed on my first one was 4 years. Trust the numbers and don’t just buy to buy. You make the majority of your money on the purchase price, it isn’t realized until you sell or refinance, but it’s too there.
My wife and each have our 401k , I have 8k and my wife has 14k in a with two different companies we no longer work for.
I left company for another employer.
My wife was laid off because company was sold.
What should we do?.... We currently live in our primary residence but we want to invest on another property that could cashflow for us.
You can't take a loan on a 401k from a former employer. I would roll the 401ks into IRAs and invest the proceeds in good mutual funds. Make sure to update the beneficiary info on the IRAs (a lot of people forget to do that, or don't make changes as their families grow).
If you liquidate the funds, expect to pay about a $6.5k penalty (assuming a 20% tax rate plus 10% early withdrawal penalty-- could be more if you're in a higher tax bracket). Another way to look at it-- you're paying a 30% penalty to access these funds. Personally, I'd prefer to get a side hustle/cut back on expenses and get the money to invest rather than pay that-- how long would it take you to earn $15k? In my area it wouldn't take long at all.
I kinda wanna cash them out and liquidate or invest with it. But your input makes sense too. My wife is a stay at home mom for our 1 year old.
So its basically me providing the income at 40k a year and I do side hustles which is handy man work on the weekends. Just started out 3 months ago bringing in $300 every Saturday so yea...
You're braver than me. With that income and a one year old at home I couldn't even think about rental property investing unless I had $10k in the bank for emergencies.
I'm a risk taker I guess Haha. But I also own a home with 150k equity.. so that kinda gives me an edge i feel.
Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?
I'm not knocking the folks that suggest that you NOT withdraw from your 401K... I get it. They're right about the tax hits, for sure. BUT... as someone mentioned, you can borrow from your 401K at a great interest rate. I've done it before with no issues.
If you've got a great deal that you are sure you can make a decent chunk on, you'd be a fool not to borrow from yourself. Look at the alternatives: borrow from a bank; borrow from a hard money lender; borrow from a relative; borrow from a friend; owner finance; subject to; take from your savings account (which you shouldn't have that much sitting in there making pennies anyway, and if you do, it's for emergencies). Your 401K performs the best, and any money borrowed has low interest attached to it. Also, some employers match what you put in up to a certain percentage. That means you are literally being given free money. Sounds pretty solid to me.
Always consult an expert first! But lets talk retirement.. What will you do at retirement if you don't have a 401K because you invested that money in a investment property? The property is your retirement...
I don't know what your early withdraw fee would be and if I remember correctly the fee would only be on the income/profit produced, not the principle.
if the property you would be purchasing was to cashflow the amount you would be taking a hit on for the early withdraw fee lets say in 12-18 months. My opinion is it will be well worth it for you to do so! Good luck!
Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?
You can do a self directed IRA conversion but if not then Yes I'd do it.
@Justin Reyes I dont know if anyone mentioned it but you may not be vested in the company yet. Which means you would only get the part that you contributed and not the employer contribution. It's a bad idea. You need to forget the 401k until you retire. Then you will be happy you never touched it. That's what I did and I can retire early now.