...cash in a 401K ?
 

I'm considering cashing in a 401K.
The fact is I want to re-invest it in real estate but I guess that's not a valid investment. Besides the fact that it bugs me I can't just put it where I want without penalty, I could use some info regarding what's involved in cashing in.

I hear there's about 20% penalty on the amount. Is that about right? When does it come due?

As you can see I really have a simple question. What do I need to know about cashing in this thing?

Re: ...cash in a 401K ?
 

Cashing in a 401k is generally a bad idea. You would have to really make a killing in the investment to make up for the taxes and penalties.

1st off, since the money was probably taken from pretax pay, you will be responsible for whatever the tax rate would have been.

Secondly there's a 10% penalty (there are exceptions to this like if you're buying a home for the first time, or in some other cases like educational expenses but it's rare that these exceptions ever apply).

You're probably looking at closer to a 30%+ reduction in the amount you take out. If you're a homeowner already, it would likely be better to take out a home equity loan or do a cash out refinance of your existing mortgage (depending on the interest rate you currently have) as they can reduce your tax burden rather than increase it.

I'm sure others will be able to offer similar or better advice...

dang - all that cash just sittin there.
well yeah it has risen about 30% - so that's what I'd be losing I guess.

401k's are best saved for retirement. as has been said above, you will pay a penalty as well as being taxed when you cash it out. it's better to let it stay there and gain more interest so you can use it when you REALLY need to - after retirement.

You can always start investing in a Roth IRA until you reach your yearly max then contribute to your 401k or use the remainder for houses. That doesn't help your real estate investments all that much, but it would allow you more flexibility in your investments and it grows tax free since you've already paid taxes on it.

Check with your employer, many offer their employees to take out a loan against their 401(k) plans up to a certain percentage of the cash value of the plan.

Generally, you are required to make monthly payments back into the plan, and pay yourself "interest" as well, usually a very low rate though. 1-4%

The loans (from what I have seen) can generally be amaturized over extended periods... hope this helps :D

If you go this route, be sure you are well versed in the details of the loan. Should you lose your job or decide to leave this employer, the loan becomes due after you leave. If the case is you losing a job, it can be the worst possible time to have to come up with a big wad of cash to pay it off. If you don't pay it off, it will be treated as a withdrawl and be subject to the same taxes and penalties.

The Federal penalty is 10%, your State may or may not have additional penalties. So you would owe taxes on the money as if it were income in the year you made the withdrawl. In addition to the taxes, you would owe an additional 10% (to the Fed).

When you make your withdrawl, your 401K custodial is required to withhold 20%. This is similar to the withholdings made on your paycheck. The 20% isn't specifically for any certain amount, rather in anticipation of what you will owe between taxes and the penalty. Meaning, when you file your taxes for the year of the withdrawl, you may owe the balance (of taxes and penalty).

One way to do what you want is change jobs (or quit) and roll over your 401(k) into an IRA. Then you can "self-direct" your IRA to invest in real estate. There's a great (recent) book on this called IRA Wealth by (I think) Patrick W. Rice. At any rate, I know the title is correct. The book is specifically about using your IRA to invest in real estate.

Here is the catch, if you roll your 401(k) into a SDI (Self-Direct Ira) you will pay taxes if it is a Roth. Most experts suggest investing in real estate through a Roth rather than traditional. Get the book IRA Wealth and look at http://www.trustetc.com/

401(k) loans have a somewhat hidden downside to keep in mind......you are going to be forced to pay taxes twice on the money.

Here is how it works.....your contributions to the plan are typically pre-tax (and therefore untaxed). It is those contributions, plus or minus earnings, that you take out with the loan. When you repay the loan through payroll deduction or other means, you must repay with after-tax dollars. You pay taxes -- for the first time -- on that compensation in the year it is earned/received. You pay taxes a second time when you take a distribution from your account.

Getting taxed once is bad. Getting taxed twice is worse......unless there is a very strong reason for doing it. I work in the 401(k) industry and think plan loans are generally a bad idea. That being said, I took one out to help purchase my home. My advice.....think twice about tapping into your retirement savings.

I never like seeing anyone cash in a 401k. They never seem to get ahead doing it.

That said, look into the real estate without using your 401k. With todays interest rates and availability of money, can you find someone to finance the total property? Sometimes you can even get money back. If not, maybe you can find a different peice of property that can serve the same needs.

You can roll the money into an IRA if you have seperated from service. You can then buy real estate in an IRA, but be very careful. That is usually a very bad move. There are minimum distribution laws that can force people to sell when they do not want to.

Have you ever looked to see if your 401(k) offers Real Estate type mutual funds? I know it is not the same thing, but it is the same kind of asset.

Never cash in a 401(k) or IRA unless it is an emergency.

I disagree that the cash is "just sittin there." The entire purpose of the 401k is tax-deffered investment.
The 401 may not be the fastest, or highest return investment, certainly not like real estate or stock playing. However it is a beautiful way to invest over time, especially considering the tax advantages.

A bit I picked up from the Motley Fool's website, if your 401 is invested in, say, the S&P 500 index, which has steadily returned 10% since 1926, you put the money in and wake up years later much richer.

Like they said (in more detail) above, cashing a 401k is a bad idea.

Bad idea.

You'd have to make an impossible return on whatever you invested in.