401K asset reduction

[cookjj33]

I am 60 years old and want to start pulling money from my 401K for investing in real estate opportunities. I'm not yet retired and my wife works as well. I would like to remove about half my 401k to get it taxed at my current rate so this will only allow me to remove ~80k per year not to go over to the next rate of 32% which is quite a jump. Does anyone have any thoughts on a better/best way to proceed?

 

[bloom2708]

That doesn't sound like a good idea to me. Real estate is a second job. This might be the single worst time to invest in real estate. Prices are leveling off (not dropping) and 7% + rates.

Roth conversions only make sense in low income years. If you both are retired, the extra income will be at the top of your marginal rates.

I would proceed by not proceeding. Make a plan in your head and then don't do it.

Find a better hobby.

 

[cookjj33]

Real estate interested in is oceanfront high-rise that I'd pay 18% to a property management company to keep rented out. High rental potentials in the area almost year round. Not planning to make this my hobby just investment. Sounds like you are not in agreement with my thoughts so maybe I better cool my heels a little.

 

[bloom2708]

Real estate interested in is oceanfront high-rise that I'd pay 18% to a property management company to keep rented out. High rental potentials in the area almost year round. Not planning to make this my hobby just investment. Sounds like you are not in agreement with my thoughts so maybe I better cool my heels a little.

I'm just one opinion. Hopefully others chime in.

I wouldn't pay 28-32% tax on money you saved for retirement to then pay 18% to a property manager to (potentially) make some rent income that you would pay 22-32% tax on.

It just doesn't sound fun or get you closer to retirement.

But, people have different priorities.

 

[DJRR]

I'm just one opinion. Hopefully others chime in.

I wouldn't pay 28-32% tax on money you saved for retirement to then pay 18% to a property manager to (potentially) make some rent income that you would pay 22-32% tax on.

It just doesn't sound fun or get you closer to retirement.

But, people have different priorities.

+1, if it sounds too good to be true ... I don't know of any real estate deals that can make an above market ROE with expensive (tax adjusted) capital while paying 18% management fee. Maybe with rental rates from post Covid demand, but I would not expect that to be viable long term.

Tax wise it seems it would be much more efficient to only take out the mortgage payments from your tax deferred each year. If you don't have the down payment then I don't see it working.

 

[cookjj33]

I guess I'm figuring I have to pay the taxes at some point so may as well get some enjoyment while still young enough investing in something I could use in off season when rent is slow (my favorite time to be there anyway) with approx. 1/2 the account while leaving the other 1/2 as is.

 

[pb4uski]

Real estate interested in is oceanfront high-rise that I'd pay 18% to a property management company to keep rented out. High rental potentials in the area almost year round. Not planning to make this my hobby just investment. Sounds like you are not in agreement with my thoughts so maybe I better cool my heels a little.

I would be very careful. How old is this oceanfront high-rise? You've heard of Champlain Towers, right? If it isn't fairly new it could be a money pit if significant structural repairs are needed.

I'm not keen on investment real estate because of concentration risk. If your oceanfront high-rise condo happens to be an area that is a problem then you can get slaughtered.

I have a friend who had a small office building that housed his dental practice in Flint, Michigan... it didn't end well.

ETA: Besides, this is the absolutely worst time to withdraw from tax-deferred savings while you are both working and in a high tax bracket. Commonly, people consider tax-deferred withdrawals once they retire and no longer have a paycheck coming in and are in a lower tax bracket and before any pensions or SS starts is the sweet spot. That is where we are and we have been doing annual Roth conversions and paying less than 10% on average vs avoiding paying 28% or more when we deferred that income... so real tax savings.

 

[DJRR]

I guess I'm figuring I have to pay the taxes at some point so may as well get some enjoyment while still young enough investing in something I could use in off season when rent is slow (my favorite time to be there anyway) with approx. 1/2 the account while leaving the other 1/2 as is.

I get it, but seems like expensive enjoyment. I would probably look to make a tax efficient (max what bracket you prefer) withdrawal to rent a place for the time I want. Less fuss, mess, and commitment.

 

[cookjj33]

Two towers one built in 2023 the other completion expected April 2024. Orange Beach Alabama.

 

[pb4uski]

A great example of concentration risk!

The Deepwater Horizon oil spill had a significant impact on oceanfront property values in Orange County, AL. A study by researchers at Tulane University found that property values within 10 miles of the spill site declined by an average of 23% in the years following the spill. The study also found that the decline in property values was greater for properties that were closer to the spill site.

...Property values in Orange County, AL have not fully recovered from the Deepwater Horizon oil spill. A 2022 study by researchers at Tulane University found that property values within 10 miles of the spill site are still 15% lower than they were before the spill. The study also found that the recovery of property values has been slow and uneven, with some areas recovering more quickly than others.

Property values in Orange Beach, AL have not fully recovered from the Deepwater Horizon oil spill. While there has been some appreciation in recent years, property values are still below pre-spill levels. According to a 2021 study by Zillow, the median home value in Orange Beach is $425,000, which is still about 10% below the median home value in 2010. ...

 

[cookjj33]

The problem with the lower tax bracket is my wife still has another 8 years to work before fully vested to maintain her health insurance, I can go anytime (a little older) I really don't ever see our income dropping a bracket.

 

[pb4uski]

So if you retired/stopped working it would not drop before you start any pensions or SS?

You may find this calculator handy: https://www.irscalculators.com/tax-calculator

 

[cookjj33]

Possibly from 24 to 22% but for sure no lower Unless I divorce which would end up costing much much more in the long haul.

 

[OldShooter]

That doesn't sound like a good idea to me. Real estate is a second job. ...

This. And real estate in a market destroyed by a hurricane or other natural disaster is like a second job where you pay them.

Have some cabernet and nibble some Brie until this feeling passes.

 

[gauss]

With the high interest rates for investors that we are currently enjoying, I plan to divest myself of my rental real-estate in 2024 (a single inherited condo).

FWIW I locked in over 5% YTM on STRIPPED US Treasuries maturing 20-25 years out from now.

When interest rates were closer to zero, the rental real estate, for income, was more appealing to me than currently.

-gauss

 

[FlaGator]

Two towers one built in 2023 the other completion expected April 2024. Orange Beach Alabama.

As long as you're looking for opinions.....

I live on the Florida Emerald Coast about 100 miles east of Orange Beach. I also spent several decades in real estate related businesses. There is *no way* I would buy a short-term rental property at this time and point in the cycle.

Prices were bid up to silly levels in 2021-early 2022, and 2023 saw fewer bookings and lower nightly rates than prior years. OB is not the Emerald Coast, but it competes for many of the same customers.

I would let things settle for 12-18 months before even thinking about buying a rental property in our part of the Gulf Coast. Many of those who bought at the peak of prices aren't making the cash flow they expected. There are a couple of ST rentals in my 'hood like that, and they have been listed for months and are still unsold.

 

[Slim11]

I wouldn't do it as an investment, but maybe as a place to retire to 8n a few years. But it seems the wife will work for another 8. So I wouldn't do it. If you were both planning on retiring thiere and selling your curent home, them I would say go for it. But as an investment, i am out. Especially this late in the game. What if they pass a no short term rental law or no air b and b in the town? Then you may be in trouble. Not worth it to me. Too much risk not enough reward.

 

[FlaGator]

I wouldn't do it as an investment, but maybe as a place to retire to 8n a few years. But it seems the wife will work for another 8. So I wouldn't do it. If you were both planning on retiring thiere and selling your curent home, them I would say go for it. But as an investment, i am out. Especially this late in the game. What if they pass a no short term rental law or no air b and b in the town? Then you may be in trouble. Not worth it to me. Too much risk not enough reward.

Agree with most of the reasons, and those alone would be enough for me to stop and not go forward. Even without the market dynamics I mentioned above.

The county and local governments of Orange Beach AL and the FL Panhandle Gulf Coast (Pensacola east to Apalachicola) will NEVER put an outright ban on STRs. Other than the military, tourism is the economy here - and there are not enough hotel rooms to meet the demand. We have recently seen restrictions in how those rentals are operated in an effort to minimize the impact of them on surrounding homes and neighborhoods. But local politicians know better than to bring up the "B" word.

I see the possibility of changes in the tax structure that could have STRs taxed at rates more like hotels than non-owner occupied single-family residences, and I think that would help with many of the issues I see locally. There will be a steep uphill battle against the real estate interests on that, however.

 

[Slim11]

Agree with most of the reasons, and those alone would be enough for me to stop and not go forward. Even without the market dynamics I mentioned above.

The county and local governments of Orange Beach AL and the FL Panhandle Gulf Coast (Pensacola east to Apalachicola) will NEVER put an outright ban on STRs. Other than the military, tourism is the economy here - and there are not enough hotel rooms to meet the demand. We have recently seen restrictions in how those rentals are operated in an effort to minimize the impact of them on surrounding homes and neighborhoods. But local politicians know better than to bring up the "B" word.

I see the possibility of changes in the tax structure that could have STRs taxed at rates more like hotels than non-owner occupied single-family residences, and I think that would help with many of the issues I see locally. There will be a steep uphill battle against the real estate interests on that, however.

You didn't think about the property itself banning it. Happened to my freind, has 3 units in a jersey city building overlooking NYC. He bought them to airBB , they baned short term rentals in the building. So he was stuck looking for long term rentals. These were all units he bought.

 

[Aerides]

The county and local governments of Orange Beach AL and the FL Panhandle Gulf Coast (Pensacola east to Apalachicola) will NEVER put an outright ban on STRs.

But HOA's can and will.

 

[HI Bill]

Can't you do a backdoor ROTH? If not, why not just pay taxes now and reset the basis, investing the proceeds in a taxable brokerage account, while eliminating RMDs later on? In no way would I consider purchasing real estate as an investment at your age. While you could write off depreciation, you'll have a huge tax bill when you sell, assuming the value goes up. I have a former realtor friend who owns a bunch of properties, and at age 70+, he keeps 1031 exchanging them, as he doesn't want to incur the tax burden of selling them. When the economy enters a recession, you may not be able to rent the condo out. Special assessments. Etc.

 

[OldShooter]

Using the word "never" in a forecast is never a good idea. "Never" is a long time.

 

[Blue Poles]

Are you looking at buying the entire tower (or, more likely, an ownership share of the entire tower), or just a single unit or two in the tower? The former sounds interesting, the latter not so much.