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Posted: 8/27/2017 11:39:16 PM EDT
My wife and I are in our late 20s.
My wife is switching employers. She currently has $25K in her old company 401K plan. Her new company offers a very nice employer match, as does mine. Conservatively, we are on track to retire very comfortably and get to do lots of things we've always wanted to. However, When rolling over her $25K, she has the option to cash out some or all of it. We have been wanting to buy a rental property to diversify our investments. Around here, you can get a $30K-$45K property and rent it out for $600 to $700/month. We are considering cashing out $20,000 in order to have about $11,800 after taxes and the additional 10% penalty. This would cover the down payment and cover the rehab costs. We'd like to sit on our other savings, as a child may be in our future. If we don't do this now, it probably wont happen for a very long time. I know the 10% penalty is bad, but we are talking only $2,500. To me, this is worth it to have a more liquid, versatile investment that doesn't rely on the stock market. Not to mention, the rental deductions on our taxes each year. We also have plenty of time to recover if this goes ill 
What do you all think? |
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Posted: 8/27/2017 11:52:19 PM EDT
[#1]
Not that it matters too much what I think, it's your money and you do with it what you think is best for the future and your family.
That said, #3 on the '3 Critical 401(k) Mistakes to Avoid' article - https://www.fool.com/retirement/general/2016/02/07/3-critical-401k-mistakes-to-avoid.aspx |
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Posted: 8/28/2017 12:03:03 AM EDT
[#2]
Quote HistoryQuoted:
Not that it matters too much what I think, it's your money and you do with it what you think is best for the future and your family. That said, #3 on the '3 Critical 401(k) Mistakes to Avoid' article - https://www.fool.com/retirement/general/2016/02/07/3-critical-401k-mistakes-to-avoid.aspx I understand #3- however, its operating under the assumption that we will spend this on hookers and blow. We are putting this towards another investment. Ive done the math: A rental will yield us at least as much as the money sitting in the stock market, possibly much more. I guess if anyone cares, I could share the projections. |
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Posted: 8/28/2017 12:06:17 AM EDT
[#3]
you aren't talking big numbers so you can make a case for cashing out. That said if you could swing it without cashing out it would be much better. We have 20 various rentals and they have been very good investments for us but that big a hit is hard to make up. Just a suggestion but I would try hard to swing it with short term loans or put it off for short term and try to obtain funds thru saving or liquidating assets not in a tax differed instrument. $.02
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Posted: 8/28/2017 12:41:22 AM EDT
[#4]
Do the math on how long its going to take to recover from the penalties. Factoring in all the gains you would be accruing if the 401k goes in to a rollover IRA or whatever instead.
In general, I'd advise against it. Find a different way to fund your adventures. |
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Posted: 8/28/2017 2:59:23 PM EDT
[#5]
never touch you retirement
you are spending too much if you have to |
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Posted: 8/28/2017 3:25:47 PM EDT
[#6]
I am generally against cashing out 401k's.
I would prefer to work a second job for a year to come up with the cash. |
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Posted: 8/30/2017 10:07:05 AM EDT
[#7]
I have partners that did and regret it.
1. The year to year fees, owning and miaintaining it n a retirement account are to high for just a couple houses -- or ten. 2. If you lose money, in a 401k, sorry about your luck, you cannot take them or carry them forward. See rental property, Houston. investors Business Daily has an etf, in or out metric. Allows you to not just get in and pray, but provides some guidance what to do when. I believe market buying has highly concentrated modern investing to the point it will fail, google FANG stocks. I gave my now wife 2,000 for an IRA when we were dating. ABout $18,000 now.. good luck. |
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Posted: 8/30/2017 12:09:05 PM EDT
[#8]
Cashing out retirement should be a last resort to avoid bankruptcy. I definitely wouldn't use it for an investment property.
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Posted: 8/30/2017 12:13:14 PM EDT
[#9]
Quoted:When rolling over her $25K, she has the option to cash out some or all of it.
We have been wanting to buy a rental property to diversify our investments. Around here, you can get a $30K-$45K property and rent it out for $600 to $700/month. We are considering cashing out $20,000 in order to have about $11,800 after taxes and the additional 10% penalty. . . . What do you all think? Frankly, if you are not financially able to finance the down payment on a rental property without destroying 80% of your wife's 401(k), then you are not financially stable enough even to consider getting into rental properties. Take it from somebody who has been there - rentals CAN be a cash drain. Things go bad. Renters stop paying. Sometimes it does not rent for a while. Renters damage the property. You need to be financially stable to own rentals, because they are a risk. Everybody likes risk because they ignore it and look only at potential returns . . . don't ignore the risk. If $30k rental properties are really taking in $700 a month, then cash flow it. Cut your living expense budget down, save up the money, and start buying houses with cash, no debt, and rent them out. The $700 monthly, assuming 10 months of occupancy a year, will generate roughly $6000 (property taxes and other costs) so that you can save up more quickly to buy another one. Destroying a $25,000 401(k) (which is respectable for someone your wife's age) for a rental that might (might!) generate a couple hundred bucks a month seems like a bad idea. |
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Posted: 8/30/2017 7:56:17 PM EDT
[#10]
Look into other options.
Do you own your own house? Perhaps look into a HELOC if you need a bit of cash to make an investment. Leverage your house before your retirement. |
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Posted: 9/1/2017 8:34:59 PM EDT
[#11]
ermm 6k a year minus mortgage, taxes, insurance, maintenance...
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Posted: 9/2/2017 11:50:32 AM EDT
[#12]
I think people get very caught up with labels and making general assumptions without looking at it objectively.
Figure the penalties and lost return vs rental returns and tax benefits taking risk into account. That is the ONLY answer. If your retirement account would make half as much, with the same risk, is it better just because you use the word "retirement" to describe it? Nope. Not saying those numbers are what your situation would be, just illustrating a point. When I got fired earlier this year, I cashed out the remaining 140k that I hadn't already borrowed against to buy more rentals and another business with family partners. Sure, I paid a portion to penalty and taxes but my rentals are my retirement. I'm 29 and about 9 years away from having "fuck you" mailbox money. If I just wanted to make 100 or 150k and sit at home, I could do that now. Not many people can say that. I'll be closing on rentals number 50-56 later this month. I had 19 less than 2 years ago. Think inside the box if you want to retire like everyone else. Nothing wrong with that. But to say it's the highest return is seldom the case. Having money parked in the market keeps me up at night. It haunts my dreams. I can't leverage it. I can't use it for big returns. That's hell on earth. I'd rather bang a tranny that have money sitting there that isn't utilized correctly. I've always said that my 401k was my emergency fund but my rentals, land, and small business ownership is my retirement. Not saying any of this is the case for you. Just another way to look at it. Don't get caught up in labels. The math never lies but I have a higher tolerance for risk and am far more aggressive than most. |
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Posted: 9/5/2017 10:37:25 AM EDT
[#13]
We are talking about destroying the value of a 401(k) just for the downpayment on only one rental that will still have a mortgage . . .
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Posted: 9/5/2017 11:47:54 AM EDT
[#14]
Quoted:
My wife and I are in our late 20s. My wife is switching employers. She currently has $25K in her old company 401K plan. Her new company offers a very nice employer match, as does mine. Conservatively, we are on track to retire very comfortably and get to do lots of things we've always wanted to. However, When rolling over her $25K, she has the option to cash out some or all of it. We have been wanting to buy a rental property to diversify our investments. Around here, you can get a $30K-$45K property and rent it out for $600 to $700/month. We are considering cashing out $20,000 in order to have about $11,800 after taxes and the additional 10% penalty. This would cover the down payment and cover the rehab costs. We'd like to sit on our other savings, as a child may be in our future. If we don't do this now, it probably wont happen for a very long time. I know the 10% penalty is bad, but we are talking only $2,500. To me, this is worth it to have a more liquid, versatile investment that doesn't rely on the stock market. Not to mention, the rental deductions on our taxes each year. We also have plenty of time to recover if this goes ill
What do you all think? I think it is absolutely retarded to piss away 41% of your money on taxes and penalties that you will NEVER recover. |
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Posted: 9/5/2017 1:38:57 PM EDT
[#15]
Quoted:
<<SNIP>> Around here, you can get a $30K-$45K property and rent it out for $600 to $700/month. <<SNIP>> Where are you living that that is possible? Seems like crazy numbers. |
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Posted: 9/5/2017 2:00:09 PM EDT
[#16]
You might be able to buy rental property with that money and maintain the tax deferred status.
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Posted: 9/5/2017 8:54:13 PM EDT
[#17]
Save the money for rental property separately and leave the retirement alone. That $20k will multiply several times over during the remaining thirty or so years in your career. Basically - it doubles every 7-10 years. In thirty years that turns into something like $160k, with all taxes deferred.
Also, as others have said, it defies logic that you can buy a place for less than $50k that rents for over $600 a month. It is possible to make money on rental property, but I would be inclined to transfer some of that risk to a bank by financing as much as I could while maintaining a positive cash flow... -shooter |
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Posted: 9/6/2017 9:47:15 AM EDT
[#18]
So what color is the house you are buying?
@crag_dt
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Posted: 9/6/2017 1:57:52 PM EDT
[#19]
Quote HistoryQuoted:
Where are you living that that is possible? |
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Posted: 9/6/2017 8:46:45 PM EDT
[#20]
To me, this is worth it to have a more liquid, versatile investment that doesn't rely on the stock market. What rental property does provide is an opportunity for an "everyman" to take advantage of leverage to increase his potential returns. That's the whole point. As long as that is what you are shooting for and you can afford the downsides like a renter not paying for several months, trashing the place, plans a market downturn putting you underwater then I say go for it. With that said, the fact that you might need to cash out a 401k to swing it should make you pause as to whether you can afford those risks. I personally would never mess with 401k for this purpose. It's not just the taxes and penalties but also the fact that you are giving up that opportunity for the money to grow tax deferred for 30+ years. To really evaluate it you would want to create a spreadsheet to compare what kind of return you can expect on $25k in a 401k versus $11.8k in a house after taxes, insurance, interest, upkeep and some factor for non paying renters. Be realistic in your assumptions on both sides of the equation and see how they pan out. If the house does come out better in that calculation then you can decide if the extra returns are worth the extra effort. I think the rental idea can work but you should really know your numbers first. The people that suceed in that business know their costs and their real bottom line. |
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Posted: 9/6/2017 9:05:02 PM EDT
[#21]
That sounds like a really, really bad idea. Show us the cash flow you've worked up.
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Posted: 9/8/2017 12:22:37 AM EDT
[#22]
I only read the op but if you don't have the ability to buy a 40k house without Messi g with a 401k the last thing you need is a rental.
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Posted: 9/8/2017 1:51:05 AM EDT
[#23]
Quote HistoryQuoted:
never touch you retirement you are spending too much if you have to |
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Posted: 9/8/2017 2:21:12 AM EDT
[#24]
Only you can decide what's best for you.
Do you have any or can you create any self employment income? If so look into a roll over to a self directed 401(k) and use the money to buy a rental property without paying a penalty. I recommend https://discountsolo401k.com/ Read, or listen to, any of the Rich Dad's Advisors books on rental property and tax free wealth. After listening to one of the books I decided the rental property investment in a self directed 401(k) was probably not the best option for me. |
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Posted: 9/8/2017 9:53:24 AM EDT
[#25]
Quote HistoryQuoted:
Only you can decide what's best for you.
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Posted: 9/8/2017 10:22:47 AM EDT
[#26]
Quote HistoryQuoted:
you aren't talking big numbers so you can make a case for cashing out. That said if you could swing it without cashing out it would be much better. We have 20 various rentals and they have been very good investments for us but that big a hit is hard to make up. Just a suggestion but I would try hard to swing it with short term loans or put it off for short term and try to obtain funds thru saving or liquidating assets not in a tax differed instrument. $.02 |
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Posted: 9/8/2017 2:50:50 PM EDT
[#27]
Would you go to your bank and withdraw $8,000 and light it on fire in front of the teller? Because that is exactly what you'll be doing if you cash out your 401k.
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Posted: 9/10/2017 10:23:19 AM EDT
[#28]
Quote HistoryQuoted:
Would you go to your bank and withdraw $8,000 and light it on fire in front of the teller? Because that is exactly what you'll be doing if you cash out your 401k. What if 20 years later, you would have 4x as much because of higher returns? Math doesnt lie. General statements not supported by math sometimes do. My pecker twitched a bit when i saw the penalty and taxes on mine earlier this year, it was over 50k but the break even point is so close and 4 years from now ill be so much farther along that i quickly forgot it. I typically would advise to reserve such an action to use on an existing investment with proven returns though. Most people can't do accurate projections and fail miserably. On that note, even though i believe in aggression leverage, i bought my first rental with cash to get my feet wet and prove the model. Once the model worked, i put that rental, my house, and all of my cash up for more rentals. |
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Posted: 9/12/2017 8:30:30 AM EDT
[#29]
Hope im not to late but good god don't cash out your 401k to buy a rental. you will take a massive hit in the form of taxes and penalties and will likely miss out on double digit gains for th next few years before we hit the next recession. To make matters worst you are buying into a housing market that is as inflated as 2008.
Dont touch your 401k and stack cash in a money market account, like $50-100k and wait for the next dip in the market, likely only a few years away and buy a single family or w/e you are looking to buy, for pennies on the dollar. |
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Posted: 9/26/2017 10:48:21 AM EDT
[#30]
Well it's been a month. Did you buy a house or roll to a IRA?
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Posted: 9/26/2017 9:52:54 PM EDT
[#31]
Quote HistoryQuoted:
Thats not exactly objective. What if 20 years later, you would have 4x as much because of higher returns? Math doesnt lie. General statements not supported by math sometimes do. My pecker twitched a bit when i saw the penalty and taxes on mine earlier this year, it was over 50k but the break even point is so close and 4 years from now ill be so much farther along that i quickly forgot it. I typically would advise to reserve such an action to use on an existing investment with proven returns though. Most people can't do accurate projections and fail miserably. On that note, even though i believe in aggression leverage, i bought my first rental with cash to get my feet wet and prove the model. Once the model worked, i put that rental, my house, and all of my cash up for more rentals. I don't think it's something he should do on his first roll. |
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Posted: 9/26/2017 10:01:47 PM EDT
[#32]
Quote HistoryQuoted:
That sounds like a really, really bad idea. Show us the cash flow you've worked up. |
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Posted: 11/6/2017 5:49:48 AM EDT
[#33]
Transfer it to a self directed ira and then direct that entity to purchase the property For The Benifit Of (your new IRA name) and then watch it grow
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Posted: 11/7/2017 12:29:37 AM EDT
[#34]
Quote HistoryQuoted:
Well it's been a month. Did you buy a house or roll to a IRA? Due in part to being so risk averse and the advice of my friends on arfcom. 
In theory, it could turn out good. But when it gets down to actually taking a risk.... That makes it a lot harder. Maybe in a few more years we will begin our rental empire. |
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Posted: 11/7/2017 10:47:57 AM EDT
[#35]
Quote HistoryQuoted:
We are not buying a rental. Due in part to being so risk averse and the advice of my friends on arfcom.
In theory, it could turn out good. But when it gets down to actually taking a risk.... That makes it a lot harder. Maybe in a few more years we will begin our rental empire. Quote HistoryQuoted:
Quoted:
Well it's been a month. Did you buy a house or roll to a IRA? Due in part to being so risk averse and the advice of my friends on arfcom.
In theory, it could turn out good. But when it gets down to actually taking a risk.... That makes it a lot harder. Maybe in a few more years we will begin our rental empire. 
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Posted: 11/26/2017 11:40:33 PM EDT
[#36]
Quote HistoryQuoted:
It states right in your op that you want to cash out and buy a rental property Are you trying to goad me back into this?
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Posted: 11/26/2017 11:42:46 PM EDT
[#37]
Quote HistoryQuoted:
So what color is the house you are buying? @crag_dtNo, we decided not to do this. Maybe in a couple more years we will just shell out some of our savings like a normal person. |
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Posted: 11/26/2017 11:47:13 PM EDT
[#38]
Quote HistoryQuoted: I think it is absolutely retarded to piss away 41% of your money on taxes and penalties that you will NEVER recover. I still think the $2500 penalty would be worth the risk in the long term. Y'all are really gonna make me show my math on this one... |
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Posted: 11/27/2017 7:46:03 PM EDT
[#39]
Personally I wouldn't do it.
Too much hassle, not enough return. I bet you could roll that money into a reit if you're really set on real estate. And reits won't drag you through the court system or shit all over your carpet. Ymmv. |
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Posted: 11/27/2017 10:12:48 PM EDT
[#40]
Quote HistoryQuoted:
Personally I wouldn't do it. Too much hassle, not enough return. I bet you could roll that money into a reit if you're really set on real estate. And reits won't drag you through the court system or shit all over your carpet. Ymmv. |
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Posted: 11/28/2017 11:40:25 PM EDT
[#41]
Quote HistoryQuoted:
Personally I wouldn't do it. Too much hassle, not enough return. I bet you could roll that money into a reit if you're really set on real estate. And reits won't drag you through the court system or shit all over your carpet. Ymmv. Stocks, Bond, Mutual Funds and ETF; essentially none of them of them have property taxes, insurance premiums, legal nightmares, or busted pipes. |
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Posted: 11/29/2017 12:51:18 PM EDT
[#42]
Quote HistoryQuoted: I like this idea, people often recommend a rental company to deal with the whole tenant/maintenance thing, and they take a hefty cut. Why not just invest in the companies that do this! Sort of how I feel about gold/silver. Forget buying the stuff, invest in the companies that dig those things (and other stuff) out of the ground and/or the equipment they need to buy to do the digging. Stocks, Bond, Mutual Funds and ETF; essentially none of them of them have property taxes, insurance premiums, legal nightmares, or busted pipes. |
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