24 years old! Should I cash in Roth IRA to buy rentals?

Question

I am 24 and I am a merchant mariner. I have been sailing on the Great Lakes as a Deck hand. I sail during the summers to pay for school and 4 years ago I stayed out for a full year.  That left me with a nice bank account after I paid for school and put a large sum away into a Roth IRA, but after the last 5 years I have not been happy with it.  I know it's a long term investment  but after the last few years of getting updates it hasn't done as well as I thought it should have.

I have a good amount in the Roth IRA, and I have been looking at homes around one of the major local universities. There are a lot of duplexes under 10 minutes from the heart of the college, and under $50,000. I have seen what real-estate can do for people, because my grandfather was a developer in the Washington DC area.  His 10 children are still reaping the benefits of his work.

I guess what I am asking is if my idea of taking some,  if not all,  of the money out of my Roth IRA would be a good idea. My gut tells me probably not, but I think the benefits in the long run of buying these homes would set me up for the long haul.

Jordan B. · Answer

Hello @Timothy E Sullivan. I am also 24 and I bought a duplex about a year and a half ago. I did that before opening up a Roth IRA. Since then I have opened a Roth IRA as a long term investment with no intentions of ever touching that money until retirement. In my opinion, I think you should keep that money in the Roth and ride the market out. Have a seperate bank account and use that for real estate. This will keep you nice and diversified. Not to mention you'll have that Roth money handy if sh*t ever hit the fan. Good luck!

Shiloh Lundahl · Answer

@Timothy E Sullivan I will share a strategy that I am considering. I would defiantly encourage you to talk with your CPA before trying what I will tell you to make sure you are operating within the tax code guidelines.

I would encourage you to get a friend who knows how to invest in real estate really well. Also, you will need to know how to invest really well in real estate also for this to work. Make sure that the you are not family. Then you switch your Roth IRA into a self-directed Roth IRA and then you put your money into fund his deals while using hard money and private money lenders to lessen the amount you need to put in. Then he gives you all of the profit on that investment and then you do the same for him.

It is my understanding that you can not invest in your own deals using a self directed IRA but you could invest with that friend and that friend could do the same for you. That way you could potentially grow an enormous sum tax free.

If anyone sees anything illegal or wrong with this according to tax code let me know.

JD Martin · Answer

Take your Roth and find a self-directed IRA where you can invest in real estate. Best of both worlds. I wouldn't cash it out; you've already absorbed the worst part of it (paying taxes on the front end). Everything it gains going forward is yours. If you're not happy with the performance, you can also find a better fund. Your performance might be because it's a high cost fund. You'd be surprised how much management fees can sap from your portfolio.

Frank Geiger · Answer

I do both for diversification. Read Tony Robbins 7 steps to Financial Freedom. You may be paying unknown fees and that's why the account is not performing as hoped. Over the past 5 years, the market has had some serious returns so it shouldn't be a disappointment.

Bjorn Ahlblad · Answer

@Timothy E Sullivan  I think you would be disappointed if you did not roll your IRA into a REI adventure. REI done properly and over the long term can easily out pace the Roth IRA.

Account Closed · Answer

@Shiloh Lundahl,

That's exactly what I have been doing for about 5-years now in Portland OR metro area.  I'm getting 15-19% return on my self directed retirement accounts (401k->IRA and ROTH) and it's stacking fast.  Why not stocks? I had two S&P 500 mutual funds in two different accounts.  Over the course of 8 years or so getting out of the recession, one of my accounts almost doubled while the other had hardly any gains beyond what I was contributing.  Ever since then I been doing it my self.

Account Closed · Answer

@Timothy E Sullivan

Here is another option

https://www.rothira.com/blog/how-to-hold-real-estate-in-your-roth-ira

Anthony Wick · Answer

@Timothy E Sullivan

Selling all your stocks when the market just plummeted? Yikes.

Ryan N. · Answer

I am 40years old...i took 90% of my roth ira and spent it on rental property. (around 60k). I bought 3 properties and could not be more happier wish i would have done this a long time ago.  What is the intrest rate on your IRA 2%?

Robert M. · Answer

Agreed

Dont forget to mention all the tax advantages of a Roth owned rental property. If in a Roth you should be income and capital gains tax free, that is the way I understand it. Real-estate should outpace the stock market. Be sure to buy right and you will do very well. Good luck and way to get after it at such a young age.

24 years old! Should I cash in Roth IRA to buy rentals?

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