Cares Act and Diversifying Your 401K Funds into Cash Flowing Real Estate
Author: Haydn Zeis, May 5, 2020
For certain people, right now, could be the best time to act if you are interested in diversifying your retirement account into real estate.
This article is going to explain how you could increase your retirement account balance by an additional $375,000 by diversifying $100,000 of your employer sponsored retirement plan into real estate, if you have been impacted by COVID-19.
If you have an employer who matches your contributions, you are immediately getting a great return. Think about it, a dollar for dollar match is an immediate 100% return on your investment. However, after that, real estate will typically beat the returns of a stock market averaging 7%.
Today, the government is allowing people who have been financially impacted by COVID-19 to withdrawal up to $100,000 from their retirement account.
Think about the power of using your employer match, coupled with the benefits of investment real estate.
One of the benefits of real estate versus a retirement account is that you do not have to wait until you’re 59 ½ to touch the money. Additionally, if you don’t want to be a landlord, that’s no problem if you invest in a passive real estate syndication.
If you have been financially impacted by COVID-19, right now might be the best opportunity to diversify your previously untouchable retirement account!
Requirements for early withdrawals and loans from your 401k retirement plan have been relaxed for 2020.
What does this mean?
$100,000 can be withdrawal from your account without the 10% penalty or the 20% withholding.
The withdrawal is considered ordinary income.
You have 3 years to pay the tax.
Up to $100,000 or 100% of your balance can be borrowed.
You can suspend principal payments for 2020.
Interest is not tax deductible.
How to qualify:
You or your spouse have been diagnosed with the virus SARS-CoV2 or with coronavirus disease 2019 (COVID-19).
You are experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced.
You are unable to work normal hours due to lack of childcare.
You must close or reduce business hours of a business owned or operated by the individual due to COVID-19.
You may qualify if you can prove other factors as determined by the Secretary of the Treasury.
Below, an illustration that shows how using real estate to diversify your retirement can be extremely beneficial.
For easy math, we’re keeping the numbers simple.
Average Salary: $200,000
Retirement Contribution: 5% of earned income
Employer Match: Dollar for dollar up to 5%
7% Annualized Return
Real Estate Investments
8% cash on cash ROI
10.71% Annualized ROI
Investment Timeline A illustrates that if you keep your cash in your employer sponsored retirement plan, while making regular contributions of $10,000 per year while receiving the employer match of the same, and receiving an annualized return on investment of 7% you will end up with $1,746,291 after 30 years.
401K and Real Estate
Investment timeline B illustrates that you keep the same strategy as timeline A with one exception. You invest the $100,000 401k withdrawal from the cares act into real estate at the 10-year mark while continuing to invest in your employer sponsored retirement plan.
You’ll see that taking $100,000 out of your retirement plan lowers the 30-year balance to $1,359,320. Though, as an investor, you have already received the biggest benefit an employer sponsored retirement plan offers. The match.
Using the $100,000 to invest in real estate you’ll receive an over the next 15 years with an 8% cash on cash return on investment having an annualized return of 10.71% if you include appreciation and principal paydown.
Yearly uncompounded cashflow is $8,000 per year. Over 20 years, that is $160,000.
When the property gets sold, you will receive $605,133 in cash. This is from principal paydown over time and appreciation.
You would have earned a total of $765,133.
So diversifying your matched retirement savings into real estate, would bring your 30 year balance to $2,124,453.00
That’s a $378,162 dollar savings.
The best part about an employer sponsored retirement plan, aside from the tax deferral is the match. If you have already received that benefit, investing in real estate with the $100,000 from your retirement account could be an extremely powerful way to diversify your portfolio and build more wealth.
As a disclaimer, everyone’s financial situation is different, and you should always consult with your CPA, attorney, and trusted financial advisor before making investment decisions. Haydn Zeis - Principal
Lonicera Management, LLC
May 5, 2020