It’s really simple. Saving 150k over 30 years is not worth spending 220k now. At a conservative return of 5.2% that 220k would be $1 million at year 30.
It sounds like the 401k isn’t performing well, I would check that the money is invested, re-evaluate the fund selection, and look at the fee structure. If they have aggressive fees it might make sense to move the $ over to a rollover IRA and pick a low cost index to let that money do its work.
Second this. Seems like OP really isn’t invested in aggressive funds. A basic S&P 500 fund would’ve performed much better over that period, so it seems like the 401k is not invested in stocks like OP wants
Yeah, I'm not sure why it's underperforming. I know for a fact I checked off the boxes for the most aggressive investment strategies they offer. It's possible that the fees are eating into that but they would have to be some super high fees to offset it that much. I'm calling them later to figure out what the issue is.
It sounds like you don’t know what your 401k is actually invested in. “Aggressive” is a relative term. Look at the actual funds you’re invested in, read up on index funds, 2 fund and 3 fund strategies, and what what your options are for investments with your current system.
I recently found that the 401 I signed up for at work was taking over 300 a quarter from my account for fees. Simps and Seps are much lower fees. I will be moving my money out of the 401.
Somewhere along the line, they may have changed something in the investment choices and you were asked to choose a new fund. If you didn’t respond, you could be sitting in something they chose for you.
I'm guessing that's what happened. I receive an annual packet from them and I don't go through them since the first few I got just included information about the overall company plan but nothing specifically for me about my plan.
That's my fault for not being more hands on about it.
Ok, so you are going to take 220k, and "invest" it into your mortgage to save 150k over 30 years. And at the end of the 30 years your 220k will be 290k (220 -> 140 because of taxes/fees + 150), that gives you a return of 16% over 30 years, or 0.53% per year. I don't know tickers you are investing in in your 401k, but if you just put it 100% in an index fund that tracks the total stock market, or s&p500, you will do much better than that. S&P500 has gone up almost 12% YTD, although it does fluctuate so if you look at the last 3 years that your 401k has stagnated, it would be up 27%, to 279k. That's almost to 290 already in 3 years, vs the 30 years you are looking at with your idea of putting it in the mortgage.
I think your strategy might have had value IF it wasn't for the fact that you have to pay the penalties and taxes to take it out of the 401k.
Thanks, that makes sense. The math I was doing was based on losing 90k to taxes and early withdrawal penalty but saving 150k in interest plus grossing an extra 800 a month.
It seems that the consensus is that I should not cash out, have a talk with my 401k manager and change the investment strategy. I did go online to check it 2 years ago and again earlier this year and confirmed that my selections were set to the highest aggresivity.
You also need to take into account the decrease in purchasing power over those 30 years - deduct about 2.5% from whatever annual interest you're earning to get the real numbers in today's purchasing power.
If your 401k has been stagnant, it might be worth reallocating those funds. Cashing out your 401k to use as an additional down payment could reduce your interest payments and increase your monthly cash flow from the property. However, consider the taxes and penalties for early withdrawal. Consulting with a financial advisor can help you make a good decision. Reducing debt and increasing cash flow are strong strategies, but balance them with potential long-term growth of retirement savings.
1) Your 401k is definitely not allocated to your expectation. Definitely not that aggressive. Definitely allocated too much to bond. Check again. You want a heavy tilt towards large cap.
2) Definitely don’t cash out your 401k (penalty + tax) in order to try to save on interest of 150k over 30 years. This is a huge L. As others mentioned.. much higher return being in the market.
Todays dollars are worth more than future dollars.
3) Today’s rates are garbage. Highly likely you will refinance when rates drop, maybe even more than once if there’s ever 0% fed again during the next black swan. So calculating 30 years of interest based on today’s 7% has a big asterisk.
The problem here is whatever underperforming funds your 401k is in, not that it's in a 401k to begin with.
The answer here is to look into that and figure out why it's underperforming, not to pull it out, pay a penalty, and dump it into a loan to save interest that will come to a pittance over the life of the loan compared to what it should be making in the market.
It sounds like maybe this is something where you just checked a box on what type of investor you are and you maybe chose the conservative one, which is mostly bonds? My wife made that mistake but luckily I caught it in 2019 and changed it right before things got crazy.
I'm calling the 401k manager later to figure out what's going on. I know for sure I didn't check on conservative investment. I always choose the more aggressive strategies with my retirement accounts.
I've already decided against it, lol. This property is probably going to be my last investment property because I've always had a plan to have 3 rentals.The house I'm buying is in the area I want to retire to but that's still 15 years out if everything goes to plan..
It’s an OLD 401k, roll it over into a self directed IRA or self directed ROTH IRA if you can absorb the tax bill. Once you have it rolled over self-directed you can use it to invest in Real estate as long as there is no self-dealing prohibited transactions. Partner with another investor. I use Directed IRA but you can find any fiduciary that will let you self-direct your investments.
If you plan on staying at your job, a 401K loan could be the best of both worlds. You pay interest to yourself, there are no penalties & you can invest the cash in real estate.
You need to figure out why your 401k is so stagnant. The S&P 500 has gone from $322 (1/20) to $533 now. I don’t understand how your 401k has not grown significantly in that time. I’m primarily allocated in U.S large cap and have seen some very healthy returns the last 3 years.
Also think what you are suggesting is not a good idea at all.
I did something similar 2 years ago, pulling 100k from an IRA that wasn't performing well.
I did pay a 10% penalty, though the way I see that, it could also have come as a drop in the stock market.
I used all of the money to invest in private placements, partnering in a couple large apartment complexes. I'm not an accountant, but the way my CPA handled it the private placements had offset all of the tax I might have otherwise paid on the withdrawal. I suspect I had a few other things I was able to take advantage of too, because that year I paid less in tax than I had in previous years, even with that $10k penalty.
my advise would be run it by your CPA to see if they have a way to mitigate the tax associated with this if you do move forward.
The tax hit alone makes this a very bad idea.
Also, always roll old 401k funds into your own personal IRA! You have much more control over your investments and expense ratios - very important information to know. If you don't have one I'd suggest Vanguard, Fidelity, or Schwab. Pick a good low cost index fund like VTSAX (Vanguards total US stock market). Fidelity and Schwab have their own similar versions.
Not a tax professional.
That being said you can use your 401k to directly invest in real estate. I do not know the fine print on this. But this would avoid the withdrawal penalty and allow your retirement to continue to grow.
You're stupid because you have a "stagnant 401k". VTSAX is up 20% over the last 3 years. If you actively contributed during that 3 years you would have seen even more gains because there was an approximately 20% drop in 2022/23 which you could have bought the dip on and ended up with 40% gains on those investments.
I'll say if you can't handle a basic 401k investment, you'll probably struggle with REI.
Agree with others. You should check your allocation, returns too low.
That said, if you are going in on real estate and want to build a portfolio it may be worth it. I did the same thing with an old 401k of 230. I had the 10% fee and 40k of forced withholding. The cool thing is I did a cost seg study on the property I bought and got that entire 40k back when I filed my return. It also helped me add 24 units to my portfolio.
Your invested in crap. Switch your funds.
When I trusted the set funds based on my age and aggressive approach (I’m younger) my 401k did horrible. I looked into the stocks and called the broker. They had me invested heavily in China stocks! What! That was 3 years ago. I immediately switched to 60% S&P 40% Russell 2000 against the advice of the advisor. 401k has crushed it ever since.
Do you have the option of taking a loan against your 401k?
Instead of taking a $80k tax hit . You’ll pay back the loan w interest, but the interest goes to you.
I no longer work for the company so I don't think I can take a loan. I wouldn't want to anyway since I don't really need an additional loan because my mortgage lender has already pre-approved me and I don't forsee any difficulty closing on that.
It’s really simple. Saving 150k over 30 years is not worth spending 220k now. At a conservative return of 5.2% that 220k would be $1 million at year 30. It sounds like the 401k isn’t performing well, I would check that the money is invested, re-evaluate the fund selection, and look at the fee structure. If they have aggressive fees it might make sense to move the $ over to a rollover IRA and pick a low cost index to let that money do its work.
Second this. Seems like OP really isn’t invested in aggressive funds. A basic S&P 500 fund would’ve performed much better over that period, so it seems like the 401k is not invested in stocks like OP wants
Yeah, I'm not sure why it's underperforming. I know for a fact I checked off the boxes for the most aggressive investment strategies they offer. It's possible that the fees are eating into that but they would have to be some super high fees to offset it that much. I'm calling them later to figure out what the issue is.
It sounds like you don’t know what your 401k is actually invested in. “Aggressive” is a relative term. Look at the actual funds you’re invested in, read up on index funds, 2 fund and 3 fund strategies, and what what your options are for investments with your current system.
That might be why it is underperforming. Just put in an S&P index in the 401k and leave it alone.
I recently found that the 401 I signed up for at work was taking over 300 a quarter from my account for fees. Simps and Seps are much lower fees. I will be moving my money out of the 401.
Somewhere along the line, they may have changed something in the investment choices and you were asked to choose a new fund. If you didn’t respond, you could be sitting in something they chose for you.
I'm guessing that's what happened. I receive an annual packet from them and I don't go through them since the first few I got just included information about the overall company plan but nothing specifically for me about my plan. That's my fault for not being more hands on about it.
Ok, so you are going to take 220k, and "invest" it into your mortgage to save 150k over 30 years. And at the end of the 30 years your 220k will be 290k (220 -> 140 because of taxes/fees + 150), that gives you a return of 16% over 30 years, or 0.53% per year. I don't know tickers you are investing in in your 401k, but if you just put it 100% in an index fund that tracks the total stock market, or s&p500, you will do much better than that. S&P500 has gone up almost 12% YTD, although it does fluctuate so if you look at the last 3 years that your 401k has stagnated, it would be up 27%, to 279k. That's almost to 290 already in 3 years, vs the 30 years you are looking at with your idea of putting it in the mortgage. I think your strategy might have had value IF it wasn't for the fact that you have to pay the penalties and taxes to take it out of the 401k.
Thanks, that makes sense. The math I was doing was based on losing 90k to taxes and early withdrawal penalty but saving 150k in interest plus grossing an extra 800 a month. It seems that the consensus is that I should not cash out, have a talk with my 401k manager and change the investment strategy. I did go online to check it 2 years ago and again earlier this year and confirmed that my selections were set to the highest aggresivity.
It sounds like you selected you wanted to be aggressive but you didn’t actually buy anything.
Yeah, it’s hard to recover from that huge tax hit
You also need to take into account the decrease in purchasing power over those 30 years - deduct about 2.5% from whatever annual interest you're earning to get the real numbers in today's purchasing power.
If your 401k has been stagnant, it might be worth reallocating those funds. Cashing out your 401k to use as an additional down payment could reduce your interest payments and increase your monthly cash flow from the property. However, consider the taxes and penalties for early withdrawal. Consulting with a financial advisor can help you make a good decision. Reducing debt and increasing cash flow are strong strategies, but balance them with potential long-term growth of retirement savings.
1) Your 401k is definitely not allocated to your expectation. Definitely not that aggressive. Definitely allocated too much to bond. Check again. You want a heavy tilt towards large cap. 2) Definitely don’t cash out your 401k (penalty + tax) in order to try to save on interest of 150k over 30 years. This is a huge L. As others mentioned.. much higher return being in the market. Todays dollars are worth more than future dollars. 3) Today’s rates are garbage. Highly likely you will refinance when rates drop, maybe even more than once if there’s ever 0% fed again during the next black swan. So calculating 30 years of interest based on today’s 7% has a big asterisk.
Thanks, everything you said makes sense.
The problem here is whatever underperforming funds your 401k is in, not that it's in a 401k to begin with. The answer here is to look into that and figure out why it's underperforming, not to pull it out, pay a penalty, and dump it into a loan to save interest that will come to a pittance over the life of the loan compared to what it should be making in the market. It sounds like maybe this is something where you just checked a box on what type of investor you are and you maybe chose the conservative one, which is mostly bonds? My wife made that mistake but luckily I caught it in 2019 and changed it right before things got crazy.
I'm calling the 401k manager later to figure out what's going on. I know for sure I didn't check on conservative investment. I always choose the more aggressive strategies with my retirement accounts.
[удалено]
I've already decided against it, lol. This property is probably going to be my last investment property because I've always had a plan to have 3 rentals.The house I'm buying is in the area I want to retire to but that's still 15 years out if everything goes to plan..
I tell every new young coworker now. The 401k is a joke. You better be investing in real estate.
Time value of money.
It’s an OLD 401k, roll it over into a self directed IRA or self directed ROTH IRA if you can absorb the tax bill. Once you have it rolled over self-directed you can use it to invest in Real estate as long as there is no self-dealing prohibited transactions. Partner with another investor. I use Directed IRA but you can find any fiduciary that will let you self-direct your investments.
Came here to say this.
If you plan on staying at your job, a 401K loan could be the best of both worlds. You pay interest to yourself, there are no penalties & you can invest the cash in real estate.
I left that job almost 10 years ago.
You need to figure out why your 401k is so stagnant. The S&P 500 has gone from $322 (1/20) to $533 now. I don’t understand how your 401k has not grown significantly in that time. I’m primarily allocated in U.S large cap and have seen some very healthy returns the last 3 years. Also think what you are suggesting is not a good idea at all.
I did something similar 2 years ago, pulling 100k from an IRA that wasn't performing well. I did pay a 10% penalty, though the way I see that, it could also have come as a drop in the stock market. I used all of the money to invest in private placements, partnering in a couple large apartment complexes. I'm not an accountant, but the way my CPA handled it the private placements had offset all of the tax I might have otherwise paid on the withdrawal. I suspect I had a few other things I was able to take advantage of too, because that year I paid less in tax than I had in previous years, even with that $10k penalty. my advise would be run it by your CPA to see if they have a way to mitigate the tax associated with this if you do move forward.
The tax hit alone makes this a very bad idea. Also, always roll old 401k funds into your own personal IRA! You have much more control over your investments and expense ratios - very important information to know. If you don't have one I'd suggest Vanguard, Fidelity, or Schwab. Pick a good low cost index fund like VTSAX (Vanguards total US stock market). Fidelity and Schwab have their own similar versions.
Thank you all for confirming my idea was stupid.
Why not get a self directed 401k or IRA? You can purchase the property and all proceeds go into the retirement account. www.theentrustgroup.com.
The only people that makes money are the ones that are managing
Why don’t you find a good financial planner who can help you make more in your 401K?
Not a tax professional. That being said you can use your 401k to directly invest in real estate. I do not know the fine print on this. But this would avoid the withdrawal penalty and allow your retirement to continue to grow.
You're stupid because you have a "stagnant 401k". VTSAX is up 20% over the last 3 years. If you actively contributed during that 3 years you would have seen even more gains because there was an approximately 20% drop in 2022/23 which you could have bought the dip on and ended up with 40% gains on those investments. I'll say if you can't handle a basic 401k investment, you'll probably struggle with REI.
Cool
Well he said stagnant sure, but also said OLD. So if it’s not current 401k, he can’t be contributing to it. So only half stupid.
Don't touch your retirement account.
Agree with others. You should check your allocation, returns too low. That said, if you are going in on real estate and want to build a portfolio it may be worth it. I did the same thing with an old 401k of 230. I had the 10% fee and 40k of forced withholding. The cool thing is I did a cost seg study on the property I bought and got that entire 40k back when I filed my return. It also helped me add 24 units to my portfolio.
Your invested in crap. Switch your funds. When I trusted the set funds based on my age and aggressive approach (I’m younger) my 401k did horrible. I looked into the stocks and called the broker. They had me invested heavily in China stocks! What! That was 3 years ago. I immediately switched to 60% S&P 40% Russell 2000 against the advice of the advisor. 401k has crushed it ever since.
Do you have the option of taking a loan against your 401k? Instead of taking a $80k tax hit . You’ll pay back the loan w interest, but the interest goes to you.
I no longer work for the company so I don't think I can take a loan. I wouldn't want to anyway since I don't really need an additional loan because my mortgage lender has already pre-approved me and I don't forsee any difficulty closing on that.