Epic Real Estate Investing - How to Cash Out 401K (without penalty) | 630

Episode Date: April 14, 2019

Do you wish to access your 401k funds but the associated penalties dissuade you from doing so? Are you wondering how better off your life would be if you cash out your 401k? Today, we are showing you how to do just that – use your money without penalties. Learn when you should withdraw it, the difference between keeping your 401k untouched and cashing it out to invest in real estate, and how to decide between those 2 options. Learn more about your ad choices. Visit megaphone.fm/adchoices

Your financial planner wants you absolutely nowhere near, not you nor your 401k, anywhere near this video right now. Because after you see this, you just might not even need them anymore. So I'm going to show you what I mean on today's episode of Financial Freedom Friday. Hey, rock star, I'm Matt Terrio, CEO of Epic Real Estate. So you may or may not have a 401k that you're satisfied with, but there's definitely been a moment, maybe multiple moments where there was an opportunity out there you wanted to seize and you wanted access to those funds. and then you went and consulted with your financial planner, you consulted with your CPA, and there they were reminding you of all the penalties

that you would take on. And so another opportunity slips on by. If you could only cash out that 401K without penalty, I mean, how much better off could you be? Well, I've got three points for you to consider today that just might change your world. All right, so first you've got to discover the deal. That's point number one.

Find a deal that you like, and complete your due diligence, diligence and get to a certain level of certainty that you know you're going to be following through with that deal. There's no need to withdraw from your 401k any sooner than that. All right, so step two, you've got to do the math. And I say that frequently on this show, and I think a lot of people think that's a little bit to be cliche phrase. But, no, I really mean to do the math. So let me walk you through a hypothetical scenario.

So you can see how the math pans out, and then you can duplicate the math or yourself in your situation. Let's say right now you're in a 33% federal tax bracket with the middle of the road state tax of 5%. you have $100,000 in your 401k and you're not 59.5. Now, if you were to withdraw it today, you'd pay $10,000 in penalties, $33,000 in federal taxes, $5,000 in state taxes, leaving you with $52,000. This $48,000 loss is what would scare most people from cashing out their 401K. Understandably so, that's a lot of money. But it's not yours to use until you're 59.5. So is there an alternative cost to consider if you, wait until then. Well, let's look. Here are your two scenarios. You could leave it there and do nothing.

And at a conservative 5% average annual return, in five years, it would grow to $127,000. In 10 years to $163,000, and 15 years to $20,000, 265,000, and 25 years to $338,000. And in 30 years to $432,000. At $59.5, that $432,000 would generate a monthly income of $1,800,000. But you have to wait until you're 59.5. Could you get that cash flow sooner without it impacting what you do receive at 59.5? Well, let's look at the second example. You could take your $52,000 out right now to buy an income property to get cash flow right now. If you did, how long would it take for that cash flow to recoup your penalties and taxes?

Well, I'll work with very conservative yet typical numbers as if you were a client of Mercedes at cash flow savvy. You'd put $25,000 down on a $100,000 house. We've got $52,000 to work with. So let's take two. After property expenses and debt service, between the two houses, you'd receive around $500 per month. So I did all this math in advance, by the way. If you'd like to see how these numbers are calculated,

there's a link to a video in the description below that's going to show you how to do it. But in the interest of expediency, just follow me here. The numbers don't matter so much, really, as it does that you understand what to consider when cashing out your 401K early. So at $500 a month, you'd receive $6,000. thousand dollars in the first year, $12,000 in your second, and so on. And it would take you approximately eight years to recoup your $48,000 loss in penalties and taxes from your early cash withdrawal. The cash flow over those eight years would have paid off those penalties and taxes to a point

where you'd now be even. So at year nine and beyond, that $500 a month would be pure profit. And it would still be there once you did turn $59.5. So if you're more than eight years away from 59.5, it might make sense to cash out. your 401k right now on just this calculation alone. If not, if you're much closer to that 59.5, maybe not. Maybe you leave your money in your 401k and just wait. Or maybe not. Stay with me. Most people would stop their calculation here, but you're not most people because you listen to this show. You know there are three other profit centers in real estate to consider. So let's look at the depreciation of these two properties. Another benefit you could take right now. So in year one,

you'd receive $2,398 tax deduction, year two, $4,796 in total deductions, year three, $7,194 in total deductions, and so on. And when considering the money, you will not be sending to Uncle Sam, your break-even point, your compensation point for those penalties and taxes just moved closer to approximately six years, two years sooner. So now, from year seven until the time you turn in 59.5, it's all 100% profit. But wait. there's more. Don't forget appreciation. You see, over the last 80 years, the average home appreciation rate has been 5.62%. And then you have to factor in amortization as well, your tenant paying down your mortgages. And it looks like this. And this is what is happening to your wealth while you're

enjoying the cash flow and the depreciation today. So at the end of a 30-year run, you can see where you'd end up. That $100,000 will have amassed to $800,000. $131,370 of paid off free and clear real estate. And you have received $180,000 in cash flow along the way. And there's $65,998 that you have extra in money that you didn't have to send to the IRS. Compare all of that to the situation that you'd be in if you left your money in the 401K. You would have never received the $180,000 in cash flow. And you would have had to pay along the way the $65,000.

$998 in income tax. And your 401k would hold a balance now of $432,000, about half the value of your real estate. And now finally, you'd be able to start receiving your $1,800 a month in income, of which that tax that had been deferred, now that tax kicks in. So when you analyze the penalties and taxes that you have to pay in an early 401k withdrawal, what's the bigger penalty? Is it the lost money from the early withdrawal or the lost time off your life, have having to wait for the much smaller benefits of the 401K.

The answer to that question will really depend on your current situation, meaning you know your age, you know the amount that you have in your 401k right now, and now you know how to do the math. And the answer to how to cash out your 401k without penalty really comes down to how you define the word penalty. The money, you can get that back relatively quickly, is this example demonstrated.

The time, though, that is gone forever. Step three, decide. Very simple. You know your age. You know how much is in your 401k. Now you just get to decide what's more costly, the momentary loss of money or the forever loss of time. If you'd like some help with this, head on over to Cashflow savvy. We've got some free information there for you. Take a look. If you like what you see, you'll have the opportunity to pick a time for us to talk. And then we'll hop on the phone and see if there's a good fit. All righty, I'll see you next week on another episode of Financial Freedom Friday. For more top business podcasts, visit c-sweetradio.com.