Reinvesting 401k money in vacation/rental?

Aurel · Aurel's Garage

My wife and I were discussing tonight about taking money out of a 401k (hers!) to buy a waterfront vacation condo in a nice area, that we could enjoy and rent weekly when we don't use it. There are some really good deals out there, and the 401k does not make much anyway. Considering the penalty of taking the money out early, does it sound like a stupid idea or not? If we buy a place for cash, even if it is not rented all the time, we can always generate some income and sell it later, hopefully for more than it costs now...

masraum · 09-17-2010, 07:41 PM

I'm curious about the answer. Honestly, it sounds like a bad idea to me, but I'm sure it could be made to work.

Hugh R · 09-17-2010, 07:43 PM

The tax penalty is not just the 10%, its also treated as ordinary income and you will be taxed on that amount plus your salary, most likely bumping your taxes a whole lot. So figure that into the equation. Waterfront property hopefully on a barrier island is pretty nice.

Aurel · Aurel's Garage

It would be nice if Obama dropped the taxes on $401ks. THAT would jump the economy, so he won't do it...

aigel · aigel's Garage

Why not buy the place without raiding the 401k? Interest is crazy low right now. Lower your 401k contributions if you must.

Personally I am all against vacation property. The problem is that it forces you to go to the same place every time. I would rather rent a nice place and change venues. I guess it depends on your personality. Some families get a kick out of having gone to the same place every summer for 80 years ...

G

Aurel · Aurel's Garage

Is the income taxation of a 401k based on the whole amount, or only the interests?

aigel · aigel's Garage

Quote:

Originally Posted by Aurel

Is the income taxation of a 401k based on the whole amount, or only the interests?

That would be the whole amount. It was taken out of your income before taxes. So taxes are due on it when you take it out. Early or later (during the regular period).

One thing I forgot to mention earlier is that you can get a loan against your 401k. You should check into that. I would suggest a decent down payment on the vac. property from your savings and add a little out of a 401k loan. Then finance the rest.

G

masraum · 09-17-2010, 08:13 PM

Quote:

Originally Posted by Aurel

Is the income taxation of a 401k based on the whole amount, or only the interests?

If you asked for $50k, you'd get $40k, then at the end of the year, you'd have to fork over another $5k. 20% when you get the money, plus another 10% at tax time. It's not pretty.

Aurel · Aurel's Garage

Okay, so I figure 10% penalty + 28% taxes = 38% at least. No good.

Hugh R · 09-17-2010, 08:21 PM

Depends on your tax rate. As Masraum said, say you pull out $50K then you've got a $5K penalty plus the tax on the entire $50K on top of your income. If you're in the 33% tax rate, another $15K or so in taxes on top of the penalty so you net pay about $20K on a $50K withdraw. Sounds like 40%. Talk to a tax adviser.

aigel · aigel's Garage

Sorry for the broken up posting. Just thinking out loud at this point.

The nice thing with financing most of the place will be that it is either a second home or income property which both are tax deductible (interest in both cases and more on the investment property).

Hope this helps.

George

Aurel · Aurel's Garage

If I understand well, one can borrow money from his own 401k, and repay it with after tax dollars with interests that are added to the 401k.

Now, there is a limit of 5 years on these loans, except for the primary residence. So, could I refinance my home with my own 401k , and keep all the interests into it instead of giving them to a bank?

KFC911 · 09-18-2010, 03:13 AM

What you're asking about seems like a VERY bad idea to me, but one "can" receive 72(t) distributions from 401k/IRA accounts "over time" and avoid tax penalties. I'm considering doing this for one of mine for a similar investment purchase (gradually moving from equities to "hard assets" over time). From you questions already asked...I don't think you want to go there however. This "option" is under the radar for most, and requires due diligence...good luck!

ps: Why isn't your wife's 401k "performing" MUCH better than the meager interest you would be "paying yourself"? "Borrowing" against one is almost always a bad idea (for numerous reason) imo...I wouldn go there.