With the booming real estate market in recent years, more and more Americans are considering cashing out their 401k retirement accounts for down payments on investment properties or primary residences. However, there are strict IRS rules and tax penalties around 401k withdrawals that need to be understood. This article will analyze the pros and cons, rules, tax implications, and process of withdrawing 401k funds from Fidelity accounts for real estate investments.
The benefits of using 401k funds for real estate
Using pre-tax 401k funds for real estate down payments can be beneficial in several ways. First, it allows investors to capitalize on hot real estate markets and low interest rates without coming up with cash. Second, mortgage payments, insurance, repairs and utilities on investment properties can be deducted against rental income, providing tax advantages. Third, real estate historically appreciates over time and can serve as an inflation hedge. However, the cons below need to be weighed carefully.
The risks and cons of 401k withdrawals
The biggest risk of 401k withdrawals is that it deprives investors of future potential compounded returns. Investors also face double taxation on the withdrawal if in a Traditional 401k – income tax when withdrawn, and capital gains tax when selling the property. And those under 59.5 years old will pay an additional 10% early withdrawal penalty. Investors also lose employer matching funds and give up the tax deferred benefits of keeping money in the 401k account longer term.
IRS rules around 401k withdrawals
The IRS allows 401k account holders to borrow up to 50% of their vested balance or $50,000, whichever is less. Loans must be paid back with interest over 5 years. For withdrawals, account holders can tap 401k funds penalty-free after age 59.5. Under age 59.5, the 10% penalty applies unless meeting specific criteria like disability, death or medical expenses. 401k funds can also be rolled into an IRA and used for a first home purchase up to a $10,000 lifetime withdrawal.
How to withdraw 401k funds from Fidelity
Investors with a 401k through their employers can request a distribution by submitting a form to their HR department if eligible based on IRS rules. For IRA account holders, withdrawals of contributions and earnings can be made from the Fidelity website or app. Taxable income and penalties will apply based on age and circumstances. Consult a tax advisor when devising a 401k withdrawal strategy.
While using 401k retirement funds for real estate can be advantageous, the lost retirement savings, tax penalties and IRS limits need careful consideration. Thorough planning and cost-benefit analysis is key.