Real Estate vs. 401K
My father is nearly 60 and is trying to determine whether it is a sound financial decision to pull from his 401K (and pay associated taxes) and invest in a second residence in NC. There is will be no rental money coming from this residence. The market has him nervous and he believes putting some of his retirement money towards real estate would be a safer play. Thanks for any advice!
Terry Says
Putting money into a place you want to live in retirement is not a “real estate play.” It is a financial planning decision. And it should be made in the context of whether he will be able to maintain both houses, or when he is planning to sell his first house and make the other his primary residence.
A lot depends on his age, martial status, work status. I’m assuming from your question that he is retired, single, and has a number of years to live in retirement. Over the long run, the stock market has outpaced inflation — and at age 60, only 3% inflation could cut his spending power in half in 25 years — when he is likely to still be alive and needing money!
There are a number of issues that revolve around taxes. Yes, he will pay ordinary income taxes on his withdrawals. (I assume that he is already retired, or has left the company, because he cannot withdraw from his plan (only borrow if the plan documents allow it) if he is still working there! If he is still working at the company, this entire thing is a moot point.
And tax decisions must be made with regard to the eventual sale of his primary residence. A single person can avoid taxes on the first $250,000 of gains, $500,000 for a married couple.
Look this discussion has so many issues involved that it is the perfect time for him to see a Certified Financial Planner who is a fee-only Fiduciary (not charging hidden commissions or selling stuff like annuities, etc!) Go to www.Wealthramp.com to search for one. The first meeting is free.
He should consult with a tax advisor to see if this will put him in a higher tax bracket, possibly impact the cost of his Medicare Part B payments.
There is a thought that ordinary income taxes will rise, so maybe this year is the opportune moment. But if he takes all the money out AND pays the taxes, will he have any money left over to grow in retirement.
