I’m 28 and debating whether to withdraw $60K from my Roth 401(k) to help fund a new rental property. I know the tax hit isn’t ideal, but I’m wondering if the long-term cash flow benefits outweigh the opportunity cost. Would love to hear thoughts from others who have been in a similar situation!
In the next 5-10 years, I plan to leave my current industry and transition to real estate full-time, so I’m especially interested in how this could impact that goal.
Current Financials
Roth 401(k) Balance: $105K
- Contributions: $79K
- Earnings: $23.5K
- Salary: $109K
- Contributing 6% annually ($545/month), with a 100% match for the first 3%
- Investment Growth Assumption: 8% per year
- Current Rental Cash Flow (Pure Profit After All Expenses): $7,500/month (9 units)
- Potential New Property Cash Flow (Pure Profit After All Expenses): $1,300/month
- Current Real Estate Portfolio Value: $1.4M
- After New Property: $1.7M
Withdrawal Breakdown ($60K)
- Tax-Free Contributions: $45K
- Taxed Earnings: $13.4K
Why Only $13.4K Is Taxed and Penalized
My Roth 401(k) balance is made up of:
- Total Balance: $105K
- Contributions: $79K (75.24% of total)
- Earnings: $23.5K (22.38% of total)
When withdrawing, the money comes out proportionally from contributions and earnings. So, if I withdraw $60K, about 75.24% of that should come from contributions (since that’s how my balance is structured).
- 75.24% of $60K = $45,014 → Comes from contributions (no tax or penalty)
- 22.38% of $60K = $13,428 → Comes from earnings (subject to taxes & penalty)
Taxes & Penalty on the Earnings Portion ($13.4K)
- Federal Income Tax (24%) → $3,219
- Early Withdrawal Penalty (10%) → $1,342
- Total Tax & Penalty: $4,562
- Net Cash After Taxes and Penalty Fee: $55,437
The Dilemma
If I leave the money in my Roth 401(k), continue contributing $525/month, and earn 8% annually, my balance could grow to:
- $229,865 in 10 years
- $606,905 in 20 years
But if I buy the property, it could generate $15.6K/year in pure cash flow, plus appreciation. Since I’m holding these properties for the long term (30-year loans), I’ll have fully paid-off assets around the same time I’d traditionally start withdrawing from my 401(k). Additionally, I’ll have the ability to pull equity out in the future to keep expanding my portfolio.
Given my growing real estate holdings, should I even worry about my Roth 401(k)? Or should I focus entirely on building cash flow and leveraging real estate?
TL;DR:
I’m 28 and considering withdrawing $60K from my Roth 401(k) to fund a new rental property. I currently have a $1.4M real estate portfolio and expect to reach $1.7M after buying this new property, generating $7,500/month in pure cash flow. I’m contributing 6% of my $109K salary to my Roth 401(k) and plan to transition to real estate full-time in 5-10 years.
