Help!! - Cash out my wife 401k for Duplex?

[Sam Gergley]

Hello,

Here is my idea, is it a good one?

My wife is starting a new job and we are discussing options in regards to what to do with her current 401k that is worth $16,000.

Our plan is to use whats left after income tax and early withdrawal penalty to move into a duplex and rent out our current property. 

I have about 20% of my current income diversified in my 401k and a Indexed Mutual Fund so I have a plan for retirement regardless of my wife's 401k.

Is it a good idea to cash out a 401k early to fund a rental property?

The potential numbers are below:

Renting our current place:

Rent for $1900

Monthly Cash Flow: $200 (Accounting for expenses using SFH Rental Property Calculator)

Move into duplex (FHA Loan) :

Rent one side for : $1400

Live in one side : $0 

Total Cost : -$800  (Mortgage +Expenses - Rental Income for other side)

Total Savings by Moving into Duplex:

Current Mortgage Cost - Future Net Cash Flow with both properties

$1400  - ( -800+200) = $800 in income per month

So we will go from spending $1400 a month in mortgages to actually making $800 a month.

Thoughts? 

Thanks!!!

Sam 

[Lee Davis]

You can borrow from your 401k, 50% of its value for a house, which is more than you'll get after taxes and penalties from cashing out completely. 

[Christopher Phillips]

You can't borrow from a 401K if she's changing jobs. Also, cashing out a 401K isn't worth it. By the time the penalties hit you, there won't be much left.

[Sam Gergley]

To clarify my monthly change would be 

Current situations: -$1400

New situation: - -$600

Total savings per month: $800 

[Sam Gergley]

Yea, we are anticipating having $11,00 left after 20% income tax and 10% early withdrawal.

Not a ton but critical to us getting a deal sooner.

[Carlos Tavares]

not sure about your 401k but if i had 16k and cashed out i would pay 40% in taxes and fees :/

[Patrick O'Shea]

I've taken a loan out on my 401k a few months before leaving my company. Some plans require repayment, but others allow the loan to be repaid on schedule.  You could also roll that 401k money into your new 401k plan (assuming there will be one) and then take a loan out on it. I'd talk to HR on 401k rules since plan details/rules vary. Good luck!

[Mark Nolan]

@Sam Gergley

It is generally best not to touch 401k funds until you reach age 59 1/2 because of the 10% early distribution penalty that applies in addition to state and federal taxes. However, if your spouse is age 55 or older when she left the employer the sponsors the 401k plan, she will not be subject to the 10% early distribution penalty, but the taxes will still apply.

[Kishore P.]

@Sam Gergley:

IRS makes an exception when you buy your first home. However, it comes with a 10 % penalty and income taxes. You have to question Why? would you pay a penalty to use your own money.

You are going down the right track with a plan to buy a Duplex with an FHA Loan. I instead ask you to consider a quadplex instead if they are available in your market. FHA typically mandate a 3.5 % down payments.

With regards to your 401 K consider rolling into a Self Directed IRA and investing in Investment Property.

It's important to learn how? Self Directed IRA works. Check out:

https://www.thestreet.com/story/13625516/1/avoid-these-5-traps-when-buying-real-estate-in-self-directed-iras.html

Good Luck.

[Sam Gergley]

Thanks everyone for your input.  Lots to think about.

I think it is a great idea to either roll it over into a self directed IRA or have her roll it over into her new job and take a loan out.

Thanks!!

[Kishore P.]

Sam Gergley

@Sam Gergley

I would advise against rolling your wife's current 401 K into her New job's 401 K.

The reason being the New Custodian charges Management Fees and other marketing charges on the Account balance.

You have a lot more options and control by rolling the 401 K into a Roll Over IRA or Self Directed IRA.

Good Luck.