Should You Cash Out Your 401k to Buy Real Estate?

Should you take your
money out of your 401(k) in order to buy real estate? Ooh. That’s a tricky one. That’s today’s video. Let’s dive in. Hey, everyone. I’m Clayton Morris, longtime
real estate investor, and back on the channel here
to talk to you about 401(k)s. Now, the types of
properties that I buy every year and every
month, frankly, a lot of times, I’m using my 401(k)
money to do it. It’s a strategy that
I use every year. I pull money out as
a loan to myself, and buy rental property. But that’s not what
we’re talking about. Today on the show,
we’re actually talking about removing,
totally withdrawing, your money from your 401(k),
if your provider allows for it. Now, I’m not a financial
adviser, I’m not an accountant, and I’m not a lawyer. So, go seek your
own counsel on this, but my accountant, who’s one
of the finest real estate accountants in the world,
and one of the smartest guys I’ve ever met, and
worked at the US Treasury, believes that taking the
penalty for withdrawing money from your 401(k) is worth it
as long as the real estate investment is higher
than the penalty. Make sense? Think about this for a second. If you’re going to remove
money from your 401(k) in order to buy a real estate
investment or rental property, and you’re going to get a 15%
return on your investment, and the penalty for
that tax year is 10%, do the math for a second. See what I’m saying? That people get scared,
and what he likes to say is, that, at the end of the
day, most people are scared because Wall Street
wants you to be scared. They use words like– if you
call up your 401(k) provider, and ask them about these
things, they’ll use terms like fees and penalties. You’re going to be penalized
for taking money out of your 401(k). OK. It’s my money. I put money in. Yes, my company may
or may not match it. They pick the funds, mostly. Mostly, my company
picks what funds. Some money manager
that they’ve partnered with through my employer, is
making thousands of dollars a year in fees, because we’re
paying them to manage my money. No, no, no, no, no. Most people do a 401(k)
because it’s easy. But, is it great? Not terribly. It’s a good solution for maybe
a portion of your income, but think about it, the
average 401(k) in this country, according to a recent
story in Time magazine, which broke down these
numbers– and this comes right from the Government
Accountability Office, folks. This isn’t my numbers. The average 401(k) at
retirement is only $96,000. That’s the average
401(k) at retirement. What does that mean? That means that, when
they’re retired at 65, they pull out that money. They’ve only got $96,000. What if your monthly expenses
every month are $5,000? I mean, you’re only going
to be able to live off of that for a few
years, at most, right? What if you want to travel? What if you want to buy
gifts for the grandkids? What are you going to
give to you’re only 67? You see, the problem with
the idea of the 401(k)– the idea with the 401(k) is
that we’re deferring our wealth until we’re retired. Well, what if I could put that
money that’s in the 401(k) to work for me now, today? What if I took $40,000 and
bought a rental property. And now, I’ve turned
that $40,000 into $700 a month in cash
flow from a tenant. That’s what I’m
talking about, folks. So, you go to your
401(k) provider and ask them that question. What are the fees associated
with me withdrawing this money today? They’re going to
give you a number, and I think, likely,
it’s going to be around 7%, 8%, 9%, or 10% tax. So, you’ll end up paying
taxes on that money when you pull it out in that tax
year that you took it out. So, it counts as income, folks. Right? You didn’t pay any taxes
putting it into the 401(k). Right? It’s tax deferred. That’s the way that they
try to lure you into this. Right? Well, great. Now, I’m going to pay
taxes years later when I’m in a higher tax bracket? So, think about that. They’re trying to woo you with
this idea that your 401(k), you’re not going
to pay taxes on it until later when you’re
older, when you’re retired. I didn’t know about
you, but I don’t want to retire in a
lower tax bracket. Right? I want to retire
wealthy, which means I want my tax bracket
while I’m young, and older, and older
to be going up. Right? Up. So, now when I’m
older, I’m going to be paying more in
taxes on this money, 30 years from now, than I
would if I took it out today. And pay less, because I’m
in a lower tax bracket. I’m less wealthy than
I’ll be 30 years from now. Does it make sense? I mean, this is the kind
of crap that Wall Street and these big institutions
spin on people. I mean, they take out television
commercials to try to get us, you know, like drones buying
and selling these products. It’s ridiculous. We’re planning for
your retirement. Really? If you were really
planning for my retirement, you would say, hey, Clayton,
take that money that’s sitting there in your
401(k) right now, take that little 10%
penalty this year, and buy seven rental
properties with it that are now going
to be producing each $700 a month in cash flow. Why, you think I’m going to wait
till I’m 65 to use that money? So, I mean, it’s
totally up to you, and your plan may be different. For instance, my
own 401(k) plan, I’m not allowed to touch
it unless of a hardship, or if I was to have
to leave the company. Now, in those situations, you
may not have any choice at all. You can use it sometimes for
a hardship, like a funeral. Or, you can actually
use it to purchase your first primary house. You can take that money
out as a withdrawal. There’s a list of things
you can use it for. But, you probably
are not going to be able to take it fully out if you
have the same plan that I do. But many plans will let you
fully take out your money, full withdrawal. And, yes, you’ll take that
penalty, that tax penalty. So, consult with
your accountant, and ask your 401(k) provider
what the penalty will be. Now, here’s the thing. These providers and
your accountant, if they’re not versed in real
estate, are going to be scared. OK? They’re going to be scared that
you’re even talking this way, because it’s a comfortable,
comfortable vehicle for people, the 401(k). Right? You start with a
new company, they tell you to sign up
for the 401(k) plan, and everyone feels happy. No. They’re very comfortable
in those clothing. So, just make sure when you’re
talking to your accountant, you’re very explicit about
what we’re talking about here. Which is, hey, John, am I going
to pay more on this money years from now because I’ll be
in a higher tax bracket? Hmm, well, that’s
interesting, Clayton. I never thought of it that way. Well, yes, you will
if you make more money and you’re wealthy
when you retire. You would pay more taxes then
than now when you take it out. Oh, OK. So then, why wouldn’t
I take it out now? Oh, because it’s your
whole retirement. Really? So, my whole retirement is
tied to the stock market, and 30 years from now? No, no, no. What if I can take it now
and buy rental real estate and get amazing returns
on my investment? You know, like I said,
most of my properties– I won’t even touch a property
unless I can get a 10% to 12% return on my investment,
year over year. Well, if that penalty is
only 10% in that tax year I took that money out, come on. I’m still getting a 2% higher
than the penalty return on it. You follow me? Don’t be duped by all this
financial crap you see on TV, these commercials that they
try to woo you during the Super Bowl about how to plan
for your retirement. Get smart about
this stuff, folks. Trust me. This is how you build true
wealth in this country, having your money work for
you to buy real estate now. Produce cash flow,
increase your net worth, increase your equity,
and build that stability and financial freedom. Anyway, I’d love to hear
your comments about this one. I hope I didn’t
offend anyone, and I hope I didn’t offend any
financial advisers watching this video. I love you, I do. Some of you. Just leave some descriptions and
comments in the thread below, and I’d love to jump
in and read them. Please don’t forget, you can
subscribe to my channel right over here, little
Subscribe button. We’ve got tons of
great playlists here on the channel
too, all about by buying and
holding real estate. Until next time,
everyone, I want you to go out there, take
action, stop education, just take action, and become
a real estate investor. It’s the only way. We’ll see you next time.

100 thoughts on “Should You Cash Out Your 401k to Buy Real Estate?

  • another great video morris , this is exactly what i did long before i started watching videos or reading about real state investment ,my wife change jobs and give her 401k and i told her to cash it out , with her money and my knowledge we will be cash flowing in no time iwas right and she has not regret the decision

  • In Canada they're called a Registered Retirement Savings Plan or RRSP. I fail to see how it's a saving plan if it's at risk in the market? And I just love the bank fee's of 2% and 20%. 2% in service fees for managing our money and 20% of any gains but when the market crashes they don't give back the losses that have incurred. It's such a scam. I live in British Columbia where they are now offering "Cash Back RRSP's" Like car companies offer when you purchase a new car. Brutal…We're from the government we're here to help! (ourselves).

  • Thank you for speaking the truth Clayton!! I've listened to many folks "skirt" around this 401k tax bracket issue. It's as if people are afraid to let other people know that being in a higher tax bracket is technically where you want to be since this means you will be wealthier in the future!!

  • Hi Clayton, thank you for this vid, it certainly helps change my mindset. I'm glad I found your channel!

  • thanks for the informative videos. I cashed out a 401k when I left my previous job. The financial institution sent 40% of the balance to the IRS right off the top, to cover the income tax and early withdrawal penalty.

  • Wow, ive been thinking of doing this same thing and everyone tells me not to do it! It makes perfect sense! Thank you thank you thank you!

  • im happy to hear that taking money out of my 401k for my first home is not a bad idea! thanks for sharing what you know!

  • +Morris invest Can I withdraw from my 401k when I just started my job and my 401k amount is small or do I wait for my 401k to build up to a good amount to withdraw thank you

  • I bought two single family homes through my IRA in Denver in 2013 and 2014 without withdrawal penalty. The money has to be managed through an IRA company that works with non-cash assets. You have to put 35% down for the loan. The bank has to be willing to do a non-recourse loan.
    Because of what I bought it for and rents have gone up I paid off the first house earlier this year and I am using rents from both houses

  • Clayton, if a full 401k withdrawal is taken due to a change of employers I can expect about roughly 45% tax rate (includes 10% penalty). Say along with ROI at 12% or higher on investments to justify 10% penalty, can I offset some of the tax expense I will owe by writing off investment expenses such as (rehab, insurance, depreciation, etc) to keep more of my 401k money?

  • Everyone told me I was crazy when I told them I didn't plan on retiring I didn't even touch the 401k I just bought rental properties.. my thinking was it's a great way to stay busy and the rich usually have stuff going on like warren buffet so if I wanna be like them I have to do what they do which is invest

  • I pay off my house I have around 250 if I sell it i will like to buy something that makes me some money what would you suggest

  • "Some of ya…" 😂 401ks are bad, bad, bad. They are not investments, they are savings accounts with unlimited risk and zero control. Never be a passive investor and give up control to any fund manager or financial advisor. Only ever use a 401k in a situation where you have employer contributions or matching, and then only contribute the bare minimum to qualify for the match. Then allocate the contributions to which ever cash equivalent product is offered, instead of a fund that is exposed to market risk. Most 401ks offer something like a money market option. Use that. At the earliest opportunity (like when you're 100% vested), pull that money out, penalty and all and go find a real investment that you can control your ROI and risk in. I never recommend for people to use tax sheltered vehicles when it comes to investing. That is a straight up scam. Avoid IRAs, Roths. Educate yourself, create a cashflowing portfolio of investments which offer tax advantages but without tax deferral. The only tax deferral product anyone should be using is a 1031 when appropriate.

  • If your company matches any percentage you put in, you already have a 100% gain on each dollar matched, and we havent even accounted compound interests over time.I get the better investment part, but it is also foolish to decline free money. Food for thought.

  • It gains compounding interest at a higher tax deferred amount and how are you going to be in a higher tax bracket when your retired?

  • Hi Clayton- I have 2 dormant 401Ks that I have yet to rollover to a IRA. Can I roll these into a self directed IRA (without the 10% penalty) and use this to buy rental property?

  • I do not recommend EVER cashing out a 401k when you are subject to the penalty.

    Not only will you have to beat the 10% penalty, but you'll also need to beat the regular income tax you'll be paying on it. If you have anything sizeable, you're probably talking about at least the 30% tax bracket (and that's just at the federal level). So in most cases 40% of the funds are going to go away right off the top.

    Are you going to be able to make a 40% return on any real estate transaction? I doubt it. Almost in every situation you'll be better off rolling over your 401k into an IRA.

    Now, there is a way around it, and it involves setting up an corporation and using the IRA to buy shares of it. You can then use the funds to invest in real estate. There are a lot of rules you'll have to follow, and if you slip up you could be subject to that 10% penalty I mentioned earlier. So unless you have a lawyer/CPA following your every move, I would probably suggest steering clear of this option as well.

  • I think you would be better off taking a loan out on yiur 401k up to $50,000 and pay it back within 5 years now when you retire you still have what yiu started with before the loan without the 28% tax and 10% fees.

  • unfortunately my work 'requires' a 6% contribution to a 401A. However they do match 11% to my 6%. But I still wish I could use that money for my own investment avenues instead of the ones they dictate.

  • My husband and I recently found your channel and we have been binge watching!  Your information is great and we are so excited to get started!

  • Should I hire a financial advisor? I know I can take out of my 401k for the down payment, but can I also use it for the earnest money? I'm seriously thinking about just taking it all out and investing it on my own, in real estate.

  • Interesting video. All that being said, once you retire and your main source of income goes to $0, in theory you will be in a lower tax bracket even with rental income as a source.

  • Horrible advice. Don't forget about compounding interest. Also, who in their right mind withdraws 100% of their retirement nest egg all in one year? You do it slowly hence less tax.

  • I got 15% in 2016 and 17% in 2017 in my 401k. No housing upkeep, no deadbeat renters, no property tax, and no swing in real estate market. Do you know what to do when the stock market/investments drop….you buy more. I watched people mortgage their homes to buy more homes and then the market swung and people owed way more than the property is worth and you used your home and/or your retirement to fund these losing properties. I made 19% from Vanguard funds last year too. The most powerful tool to wealth is compound interest. There may be some some instances that the real estate game will work but too much risk and drama. Put money in a fund from a good/great investment firm and make interest as they monitor the fund. Trouble free. In 2015 my 401k took a hit at -5% but recovered the next year. -5% + 15% + 17%= 27% for the three years averaging 9%/ year. And that doesn’t count my non interest 401k investments that made 19% last year and 11% since inception. I also only plan on 7% growth per year. So my money at 7% doubles in 10years with no work or at 9% it’d take 8 years. Don’t forget about liabilities of rental properties….get a PLUP which is cheap so if you get sued it can help pay for defense or settlement. $14-20/ month for $1 million in coverage. Way more risk and learning curb about the pitfalls of real estate investing. Recessions in the market recover way faster than when a property value bubble bursts. I bought a house in Vegas in 2004 and sold it at the top of the bubble, most didn’t and in 2006 the market burst. I can go to Vegas now and go buy that house for the $125k it cost me in 2004. Compound interest, especially when you are in your 20s or even 30s. You want to be rich then learn about it. I started late when it came to investing in my 401k and I’m retiring at 52. But my daughter will only have to work til she’s 41 because at 21 she will invest $10k and then $5k every year after and she will have $210k by 41 years old. Most financially savvy speakers will tell you not to touch your 401k. My money makes money while I sleep…helps me sleep better at night 😋

  • I have purchased 5 properties with IRA funds. 1 every year. Average purchase price $25K. Average rent, $660/month in Canton, Ohio. The tax hit when withdrawing from my IRA is only in that tax year. Passive income and tax-benefits go on my entire life.

  • So, i have 80k in my 401k. Would u take it and buy 2 rental properties, and be debt free. Or would u get a loan and use that money for a down payment on 5 or 6 properties?

  • Every advertisement ever made is designed to benefit the company, not the consumer. 401K's are probably advertised more than any other investment. It's unfortunate to think that most people view a 401K to be designed solely to benefit the employee.

  • Explained in a very simple but powerful way. Well done, thank you. Your video did help me and it did not bored me which is even better.

  • I can get a home loan. But, am having trouble with down payment and closing fees. Would you reccomend using the 401k loan to meet those? I cannot do a withdrawal at my company. Which, i think is a crock. But, it is what it is.

  • This is frankly irresponsible financial advice. At the most basic level, it misrepresents the benefits of a 401(K). Just one example is that it completely ignores the existence of the Roth 401(K), which is the version that I primarily use (and it is by no means uncommon). Look, you understand real estate investing; that's great. But you clearly do not understand 401(K) plans with any degree of sophistication, so you should consider the ramifications of opining on subject matter of which you only have a basic familiarity. You can disclaim "this is not financial advice" all you want, but this clearly is financial advice, and you may have jeopardized quite a few people's retirements with this single video. The average person watching your video is not a real estate guru, and you cannot cite your returns, which are made possible only through your expertise gained through years of hard-earned experience, as a realistic example for all of your viewers, many of whom would be better served with prudently-invested 401(K)'s, especially if they do not have the time to exercise their due diligence prior to entering real estate purchases, especially with property valuations being what they are today. It is very easy to for a real estate project to be miscalculated and backfire immensely, causing significant financial harm. This is amplified by the leverage that usually accompanies real estate transactions. Even if the stock market tanks, the decades-long timeframe of the non-leveraged 401(K) means such short-term fluctuations will not be nearly as dangerous to the average investor.

  • Better off taking a loan from the 401k to buy rental property that way their is no taxes and penalties to pay. The interest on the loan is then paid to yourself. IMO

  • Thanks, I've been thinking about this and now can act. Education is on my side, thanks for the jump start.

  • this is the most idiotic advice I have ever heard, most of it was pure nonsense… don't touch your 401k folks, it's a really bad idea

  • This is great. I plan to start buying rental properties in January of 2019. I've been thinking a lot about my 401k and either withdrawing or taking a loan (i cant fully cash out). What I have decided to do is to reduce my contributions from 10% to 1 %.. because my companies contributes 8% of my annual salary as long as I contribute. So it would be silly of me to stop investing since that would be free money I would be losing. Also, I've decided to take a loan out on my 401k. And contribute back the minimum during the life of the loan while I build and invest into realestate.

    Clayton, what are your thoughts on investing in New York for 1st timers.. ive been looking in syraccuse. Found some houses that look good but I want to know what is your experience with the market in New York. Thanks

  • I have almost $100k in my 401k. I'll be 57 in Dec. I'm debating on whether to wait until I'm 59.5 to pull it out or to pull it out now. My biggest concern is whether that 10% is going to be eaten up by the upcoming stock market crash anyway. I'm definitely taking at least $50k out, but that might be as a loan so I can buy RE with that. I still have a couple of months to decide.
    The other option is to convert it out to a solo 401k and use the WHOLE thing to buy real estate.

  • For anyone that has anything negative to say about this video is a moron!!! The whole reason why you watch Clayton's videos are because you obviously want to make a difference in your life financially. The people who are against what he is teaching are just plain stupid. Over 90% of you still work jobs where you have to go in, or you won't get paid. Or can't take a vacation without permission, and please don't loose your job, then you're really SOL. Bottom line… Don't tell a man how to fish when your bucket is empty and his is overflowing!!!

  • Just spoke to my 401k investment company and they don't allow me full withdrawal. I already have my 1st property. So I am just able to get up to 50% payback loan. that's it.

  • Our company has a pension plus a 401K option. Over the last 20 years I have also invested in rental properties and have 10 units. My 401k has grown enough if I cash it out to pay off my units and now produce 100% cash flow. I am only 45 and still have several years of work ahead of me but thinking of withdrawing the 401k and securing the cash flow by paying off the rentals. If I wait and the stock market goes down and I lose the 401k option It will take me about 15 years to pay off the rentals. Do I cut the cord now or hope the economy does well and let the rentals pay off them selves in 15 years and still have 401k?

  • WHAT? Why not a self-directed 401K…Entrust or Equity Trust both allow self directed 401k's that allow you to buy real estate. A great way to build your 401k

  • I had 21000 in my 401K and I took it early I ended up getting a check for 11000 that doesn't seem like 10% to me I think there's more fees then hes telling us

  • Questions:

    1. Does the withdrawal (not early) amount count as income, thus putting individual in a new tax bracket for that year?

    Example: 2018 12% $35,000, 2019 22% $75,000 ($35,000 inc + withdrawal $40,000)

    2. If you take an early withdrawal (pay 10%) can’t you defer the income tax being taken until you file your return for that year? With deductions your AGI (which includes the amount of the withdrawal) you could minimize the actual income tax you would have paid upfront, correct?
    Also, if you purchased a rental property in that same year couldn’t that further reduce your taxable income?

    3. What if you are risk averse but want to contribute to a 401k for the matching? Over time you won’t earn interest, but will have more money due to employer matching. Could you end up in a high tax bracket, but get more than you contributed due to the employer’s money is paying the tax? Or is the example below too simplified? Also, you may still have deductions, so your
    AGI could make an even bigger difference in the amount of taxes owed.

    Example: Income $100,000 per yr for 20 yrs, 5% contribution, 5% matching, $10,000 per year times 20 yrs = $200,000 in 401k. 25% tax bracket at time of $200,000 withdrawal, $50,000 taxes, $150,000 left.

    Bottom line, is it worth doing both, real estate investing and 401K( or IRA) contributions?
    There’s risks to both. Inflation and lack of control vs control and tenant issues. Which one can you control the risk on most and build the most wealth from over time?

  • No thanks. I have over $900k in the Roth 401k and $450k in before tax.
    Im debt free and not paycheck to paycheck.
    Also $800k in my Roth IRA and other investments,savings,passive income,etc..
    And no mortgage so my total living expenses is less than $1500/mo. In upper middle class area on a $135k-$160k/yr. income.
    I'm not stupid.

  • Not being sarcastic but where do you find a property that you pay $40,000 that generates $700 of monthly income.
    I have two properties. One appraised about $600k and another at about $300k and neither makes me $700 per month. By the time I pay taxes, maintenance, insurance and pay the mortgage I break even. I also have 401K money but as you explain we've been taught to stash it away. On the plus side both my properties are about 3 years from being paid and we live in a little home that is paid off.
    I truly admire people that figure it out and I will continue to research information so thank you.

  • I've worked as a lender and a real estate investor for over 15 years I borrow from my 401 and buy real estate as well stocks will be dropping as we move forward in 2019 so if you borrow now you are selling your funds high and as the cash flow comes in your paying your 401k back thus buying the funds sold back lower as you are now buying funds low once the market improves you can then borrow again when stocks are high and repeat

    good video guys

  • This is great! I do this myself and my company matches so all the penalties and fees have actually been paid by my company.great strategy!!

  • I just got my 60 day notice….so this has become my plan and then I saw your video which helped me reaffirm my plan. I will have $193k of 401 money but with 20% penalties but still enough to buy enough property to replace my income. Wish me luck the adventure starts next month when I officially get my hands on that cash.

  • If you take/withdraw money out of your 401k, yes there will be a 10% penalty fee but there is more to it. You’ll also pay capital gains tax, assuming if accrued interest and grew, and that money withdrawn will most likely put you in a higher tax bracket at the end of the year which you will have to pay o the IRS. It’s not just 10%.

  • I recently pulled money from 401K in order to pay off our house mortgage. After watching this video I'm not sure if we would be better investing this money in other properties or paying off our home? An advice would be highly appreciated….

  • Oh my gosh thank you for your words I’m about to buy a property with for rental units in Indiana where I’m from and I was struggling to gather the 20% required and now I know where to get it considering my income will increase in the future and I thought I was out of options

  • This is an older video and you have more vids on SDIRA now. Do you still think it's a good idea to cash out your 401k to invest in real estate? Is it more situational? I'm interested in starting to invest and possibly use my 401k either cashed out or SDIRA.

  • Put it this way, the fees will be paid with the percentage your employeer contributed on 🤷‍♂️ and the end you will be getting most of the money you i vested in your 401k. 🤔no?

  • Im here two years later and I know things have changed a but with taxes since then. I know you get the 10 percent penalty but doesn’t it also get taxed as income? Or are you able to use business deductions and write offs to offset the taxable income? That’s the part I don’t understand. I only have a little over 30k in my 401k and I was at first thinking of doing a ROBS(rollover start up business). However, if I can just withdraw and just pay only the 10 percent penalty or close to it, that would be awesome!!

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