@Chris C. See response to your comments.
1) When you roll over pension to an IRA the investment opportunities can be much greater than the stock market. You could SDIRA like @Carl Fischer suggested. Inside of SDIRA you can invest in almost anything (private placement, Gold Bars, REI, A passive business, crowdfunding REI) I am sure Carl could do this part more justice than me. Also, if you were to just roll it over to a IRA with brokerage house (Schwab, Fidelity) You could invest in a wide variety of ETF's, REITs or mutual funds that are or are not connected to stock market. You could invest in bonds, REITS, commodities. Not sure of your definition of the stock market so will stop there.
2) back of napkin calculation
Option A take current balance of your 401k and make assumption on your compound annual return until 59.5. Calculate the tax you owe if you were to withdrawal subtract it from the balance. I think 8% return pretax would be fair assumption. Technically, it would continue to grow beyond 59.5 as you wont withdraw it all at 59.5, you will just start withdraws.
Option B
sum up the $1800 per month additional cash flow you receive every month until you are 59.5. Technically, you should calculate the future value of this because you are not getting this all at one time.
Would be helpful to have a fee only financial planner that understands real estate help you with this model. I am going to be consulting one of these with my exit plan as well.
3) is accounted for in analysis above, because you don't pay the penalty in option A
4) It really comes down to you are concerned with CF because you are semi retiring. I am pretty sure Option A is going return way more than option B, because you just have earn a rate return in your IRA that is greater than the interest rate on RE mortgages, which is probably lower than ~5%. That rate of return is going to be on higher balance because it is before tax and penalty. Plus you have the tax writeoff of the interest. I dont see anyway that option A is not higher....but you need CF to get to 59.5.
Another option is to start taking withdrawals from you 401K to supplement the cash flow gap. There are specific rule on you how to do this prior 59.5 and not pay the penalty, maybe a CPA can chime in how the equal payments withdrawal of 401k works without penalty?
I have given these scenarios a lot thought....as I am in similar situation at age of 45 looking to semi retire. Well, I have never considered cashing out 401k, but I have 200K in cash and am debating do I pay off mortgages to get more CF, invest in more RE, or stock market. I have decided you keep all my properties and the 401k as is and if i need to supplement my CF I will go get PT job that I like, perhaps in real estate.
