Newb 401K withdrawal to invest???

I’ve been thinking about withdrawing my $18K+, pay the penalties and taxes, and use it to help purchase another property. Wonder if anyone else went this route and is willing to share their experience???

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Just in case you did not find an adequate answer, pleaee note that the penalties and taxes you are willing to pay on your 401k withdrawal will take cost you about 25% of the amount withdrawn.

After you take the 25% hit, you will probably have so little left over that you won’t really be able to do anything signficant anyway. Why pay 25% of your retirement nestegg in taxes and penalties when you won’t get any benefit?

Additionally, you are robbing your retirement account. However long it takes you to replace that money is how long you have set back your retirement fund and how much compounded interest you have lost.

Best to just save up whatever cash you think you need to have in hand to purchase another property.

Aren’t you able to borrow against your funds, using it as collateral? As long as the investment you get can cover all payments, this may make sense.


Actually you could transfer 98% (Without Closing) of your 401k into a self directed IRA enabling you to invest in real estate directly from the fund provided you are hands off in these investments!

There are no penalties and no taxes!


That’s good advice.

I know someone who took a 401k LOAN out against his 401k for $35k to use as a downpayment on an investment property, because he did not have the cash at the time the deal came across the table. He wound up paying it back within a year! That turned out to be a good move as he got a great investment house at a great price.

Also, converting a 401k to a self-directed IRA is good idea - but you need to leave / change employers to be able to do that in 99% of the cases.

Yes, I would say look into borrowing from, rather than withdrawing from, your 401(k). That way you will be paying yourself back for the loan and not paying any penalties.

If you can transfer to an IRA and use it as mentioned above (having somebody else investing it and paying you X%) then that is a great strategy as well.

I’ll take the flip side. Go ahead and pull it out, pay taxes/penalties, and use it for a down payment on residential real estate with a 20%+ gross rent yield. If you’re reasonably competent, this will give you an ROI of 25%+. Additionally, you will have extricated yourself from the whims of future legislative tax tinkerers, who will almost certainly be jacking up tax rates. You are not “robbing your retirement fund”, you are redeploying your funds in the most economically rational manner. You’re not blowing the money on a trip to Vegas or an automobile, for pete’s sake, you’re looking to invest it in one of the only truly undervalued asset classes around, which you cannot accomplish in your 401k.

If you’re truly in the 15% marginal federal tax bracket (if married and your gross income is lower than about 90k, depending on the amount of your itemized deductions), I absolutely think it’s a good move to shift your funds into an after-tax pot that is at your sole discretion, and the earnings from which you can use in any way you like.

First of all, check with your 401k administrator what % can be rolled over into IRA when in service. Some plans will restrict it to 50% of balance or some may not even allow it.

You could take a loan(if allowed as per plan SPD), but keep in mind that entire loan becomes due at once if you lose your job. Otherwise, you will have to pay tax + penalty for early withdrawal.

Check with the self-directed administrator first.

Contrary to what you read on the internet:

  • a self-directed IRA cannot invest in a real estate transaction where the IRA owner has a financial interest. ie: the IRA owner cannot put any cash into the deal (down payment), cannot manage the property, collect rents, sign leases or perform maintenance or repairs, or pay directly for the same.

  • very very few self-directed IRA’s will “invest” in a single member LLC to do the same. those that promote “checkbook IRA’s” are walking a very fine line that remains untested in tax court. And the administrator isn’t the one who is penalized if that line is crossed… it’s the IRA owner.

  • if you do find a self directed IRA administrator who will approve of a real estate deal, the admin charges will not be inexpensive, because every transaction must be performed through the administrator. Every check for bills, every rent deposit, every lease must be handled through the administrator. Soon the admin fees will surpass the tax and early withdrawal penalty you would have incurred otherwise.

I have a self directed IRA. They are useful tools for investing, including real estate investments. We have investments in real estate limited partnerships held within the IRA.

But I have yet to see anyone successfully hold rental property inside a self-directed IRA.

Going with d1beard here.

Really depends on the financing method you are using. A loan would be preferable because although you are paying interest, you are really paying yourself.

But if it is a matter of taking the withdrawal or losing a great deal with huge potential, then I would definitely take the withdrawal.

The problem with the loan alternative, is that the loan will be limited to 50% of the 401k amount. ctbz860 said that he only has $18K in his plan, so what can he really do with $9K? If he takes the loan, not only does ctbz860 have to repay the loan with interest (probably within five years), but he will pay taxes on the money withdrawn from the 401k when he reaches his age permits.

Since the loan interest was already taxed once when he earned the income, ctbz860 will be paying taxes on that same money again when it is withdrawn from the 401k.

Seems like too little amount of money to withdraw to make any significant impact on a real estate portfolio, and then still have to pay taxes twice on some of the money later.