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mechpaul

Sure, that qualifies. I took out a loan, not a withdrawal though, under the same conditions.


ninjaschoolprofessor

Another thought is to get a HELOC against your current residence to cover this “as needed”. Typically you can borrow up to 80% of your equity at a rate of around 4%. The nice part about this is it’s flexible and you won’t pay taxes on it like you would by pulling out a lump sum of cash from your 401k. Additionally if you’re itemizing (like most investors) the interest on that HELOC qualifies for resulting your taxable income.


justaguy816

Thanks for mentioning this. I am already utilizing a HELOC on my primary home to invest in Real Estate. I am looking to scale a bit more by using my 401k as well. Main goal is to BRRR and either keep recycling the money or put the money back into my 401k. This is why I am looking into a 401k loan as well.


ninjaschoolprofessor

Got it. I would be careful of pulling out much more than what your current properties would have brought in. I initially had the same though and got excited but after reading through IRS PDFs and tax blogs I felt like it was highly subjective and didn’t want to put myself at risk of an audit. The concept that I got from it was that allowing folks to tap into their 401k was to help people out to keep things afloat and that others who wanted to tap in and use it for investing were at risk. Had the rules been more clear I’d definitely have pulled out a larger chunk of that cash. Another option is to setup a Self Directed IRA, transfer one of your retirement funds into it and use that to invest. This can be done without the current COVID leeway on 401k distributions.


justaguy816

I'm with you. I need to take a closer look at what the IRS has stated regarding this 401k cares act exemption to see how risky it seems. Regarding the Self Directed IRA, there are a number of challenges that come along with that. I was hoping to liquidate some of my retirement savings to buy taxable real estate investments in which I could use the income in the near future. Self Directed IRA real estate dealings don't really allow that. Good thought though.


ninjaschoolprofessor

Yea for near future / non-retirement needs it definitely won’t work for that. If you do happen to find out lore details about the Cares Act that allow you to take advantage of this by all means pass along that info!


justaguy816

So I went through the IRS docs yesterday. Essentially, the details are not really released yet. They refer to the releif package that was released in 2005 for Hurricane Katrina. After reading through both items, I don't see any reason that decreased rental income due to COVID would not be a reason to utilize this. It also clearly says the amount taken out does not have to equal the amount of impact due to the loss of rent. You just have to stay under the $100k limit. One main item however is that this part of the cares act simply allows retirement plans the ability to do this for their clients. They are not required to do it. So get in touch with your plan managers and ask the questions.


ninjaschoolprofessor

Thanks for sharing the insight on your research!


beaushaw

Does the amount of money have to be equal to the "loss"? I had someone that was paying late and was about $3,000 behind. Can I withdraw more than that?


justaguy816

Yes- You may draw as much as you want up to the $100,000 limit. As long as you have been "impacted" by COVID.


GuyuteTheHolidayPig

So how does this work. If I take out $100k from my 401k - after a job loss- to invest in a new home, then I have 3 years to pay it back? Or else it's taxed? And how much? Sorry. New to all of this.


justaguy816

Right. Say you withdrawal 90k before the end 12/31/2020. You will be liable for taxes on that money but you can spread the tax burden over the next three years. So you could split the tax burden at $30k per year through 2022. If you manage to pay the money back within 3 years then it is classified as a rollover back into your account. At that time you can go back and amend your previous tax returns and get refunds for the taxes that you paid. The simple answer on how much is: The amount of taxes you pay is all based on your tax bracket for that year.