JD Lud Posted April 10, 2020 Share Posted April 10, 2020 A buddy of mine had this question and I was talking to him on it, curious on everyone here's thoughts... Lets say you have 500,000 in a 401k fund and are 20 years from retirement (still working and contributing) with other sources of planned income, none of which are physical assets. Now, lets say that you have wanted to purchase some land, but do not have enough cash to buy it outright and don't want a payment so a loan is not an option. Last, lets say that with the new 401k no penalty withdraw that you qualify for you could pull that cash out in a state with no income tax, and no penalty...and pay the federal tax over 3 years while you still have kids and lots of deductions...lets say in this case its 50,000 you would pull out. Lets say the land would be an hour to two away from your residence, 10 acres maybe with mountain and ocean views that you could shoot on and use as your own playground and enjoy, with only needing to pay real estate taxes. At some point it may be an option to build on or sell. Lets also say that this area in the Pacific Northwest tends to appreciate well. It may also grant you peace of mind knowing you have some diversification with something physical that you own. It might not keep up with the stock market, but the funds you would convert are money market funds so they have not lost value during the last few months. Would you do it and why. Anyone done something like this or not and regretted it either way? Link to comment Share on other sites More sharing options...
Badlands Bob #61228 Posted April 10, 2020 Share Posted April 10, 2020 My personal opinion is that anytime you pull retirement money out prior to retirement, it's a bad idea. I understand that sometimes it's necessary but it should be avoided at all cost. This land purchase sounds like a want more than a need. Find another way. Being young and poor is a lot easier than being old and poor. Link to comment Share on other sites More sharing options...
Ozark Huckleberry Posted April 10, 2020 Share Posted April 10, 2020 ‘20 years from retirement,’ — that means what, maybe 45 years old? $500k in a 401k and still contributing? And you’re asking for investment advice? Link to comment Share on other sites More sharing options...
Widder, SASS #59054 Posted April 10, 2020 Share Posted April 10, 2020 I might have read the details wrong, but if I read them correctly, here is my first thoughts: Pull money from the 401K to keep from borrowing looks like this: You lose earning on the bigger 401K. The 'loan' you refuse to take is probably set at 1 to 3% at this time. The 'TAX' you may have to pay on removing some 401K funds could be rated at 15% or higher. If thats the case..... borrow the money. The appreciation on the property you mention could well exceed the small % of the loan. Just thinkin..... ..........Widder Link to comment Share on other sites More sharing options...
Go West Posted April 10, 2020 Share Posted April 10, 2020 If you ever want to resell, It is easier to sell an improved property than raw land and generally relies on seller financing. Banks will want to lend on improved property or a construction loan, not land. If a broker or realtor is involved, the commission is higher than for an improved property. That said, they don't make any more land and in a desirable location, it will tend to rise in value. Link to comment Share on other sites More sharing options...
Widder, SASS #59054 Posted April 10, 2020 Share Posted April 10, 2020 My 2nd thought: If you already have 1/2 a mil in your 401K, 20 years before retirement, you don't need our advice. The advice of your present adviser would likely be the best words of wisdom you can find..... ..........Widder Link to comment Share on other sites More sharing options...
JD Lud Posted April 10, 2020 Author Share Posted April 10, 2020 These numbers are just fictitious as part of the story, should have clarified that just as an example with simple numbers. My buddy is building a place in SW Colorado and he is going step by step....paid for land, now building a very nice shed with living quarters until he retires or gets close at which point he starts the house. He sees this new option as a way to cut years off. The withdrawal can be repaid and no tax paid or not repaid and taxes spread over three years. Yes, the land in this example would be a want not a need, as an investment vehicle that is attractive because of being a physical asset that can be used and enjoyed while still maintaining some level of appreciation. Good points on the difficulty of selling, that is one concern. The lack of liquidity could potentially be an issue, but in this example I think the remaining funds minimize that risk. Its a crazy, contrarian thought from what all the financial advisors say....I was curious if anyone had the “I did that years ago and it was the best thing I ever did” or “I did that and screwed up big time” stories Link to comment Share on other sites More sharing options...
El Hombre Sin Nombre Posted April 10, 2020 Share Posted April 10, 2020 You could also take out a $50,000 loan in your 401k. You’d be paying yourself back the interest. I did that when I bought my home to help with the down payment. Had I waited, with the way housing skyrocketed again, it would have cost me a lot more than the loss of 401k interest Link to comment Share on other sites More sharing options...
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