Withdrawl Roth IRA and paying off rental

5 Replies

I currently have about $30k in my Roth IRA. If I understand this correctly, I think I could pull out only the contributions and not be taxed and penalty free. So, would it make sense to pull out the contribution portion and payoff the remaining balance of my rental home which has payoff around 28K that means I could rent out my current property for $500 to $1000 / month positive cash flow? Or should I withdrawal the entire amount and possibly get more after the penalty and taxes. Seems like my return on that would be better than the "loss" of leaving it in until I'm 59.5. I'm just haven't been contributing to the account in some time now and feel that the money would be used better to pay off my rental.

@James Meyer

Make sure you speak to a CPA before you do anything but just as a thought, if your current mortgage is at 5%-6% and if your Roth IRA is invested into good mutual funds, you are probably getting twice that in return. You could also transfer your Roth or part of it to a self-directed Roth and passively invest into a another property. It would not help pay off this mortgage, but it would get your Roth invested into real estate.

@James Meyer

I think you need to investigate tax free income for life. Roth IRAs are one of the best and fastest way to build wealth. Educate yourself on Roth IRAs, join groups that utilize Roth IRAs and 401ks. I would definitely not take money out of a Roth to payoff a rental mortgage at 6% APR. l love my self directed accounts in real estate and real estate related investments. PM me if you need some educational resources but start with google.

@James Meyer It's not something I would do personally.  Convert that Roth to a self directed custodian and use those funds to invest in other rental properties.  Not an expert, but the penalties you would end up paying for the early distribution could easily outweigh any benefit of paying off that mortgage early.

@James Meyer NO, never take money out of a Roth IRA. As @Greg S. says, you should use the Roth IRA to buy an investment property and have tax free income and tax free capital gains forever.  And @Carl Fischer works for an IRA custodian who can help you achieve that goal.

An Attorney I know who is a big real estate investor told me that all of his acquiring investments are in Tax Freindly ownership like Roth IRA, Roth 401k, Cesa, Health Savings etc. You have the opportunity to make all of your investments tax free...

First, let me say that I am a newbie and not a CPA or offering any kind of legal advice- experts please check my numbers and correct me if/where I'm wrong.

To simplify... DO use your Roth IRA to fund the purchase (down payment only) of an investment property IF you anticipate the return on your capital (down payment) will exceed the return of the Roth IRA (taking into considerations fees for withdrawl). DO NOT use the Roth IRA to pay down your loan at 6% APR. Why? The answer is leverage.  As long as the property cash flows, your tenants will be paying down the mortgage and you will continue to gain equity.  In other words, the return on your investment will be greater when used for the down payment than it would be for paying down the loan.

For example, if you need $20,000 for a down payment on a $100,000 investment property in which you can expect $3000 a year in cashflow (this is what is left over after paying taxes, maintenance, repairs, etc), then your ROI (return on investment) is 3000/20000=15%, which probably beats what your money is earning in the Roth IRA. However, if you withdraw $28,000 from your Roth IRA, now the calculation would be 3000/48,000 which is 6.25% ROI (and this does not take into considerations any fees you would have to pay to take the money out of the Roth IRA).

From what I understand, most investors deploy their capital (resources available for investing) on down payments (acquisition) and rehab and NOT on paying down loans.  In this way, they are leveraging their capital by essentially partnering with banks.  

Some investors choose to take it another step further by using the BRRRR strategy: buy, rehab, rent, re-finance, repeat. With this strategy you would buy smart (20% discount from market value) and rehab with your capital and fix it up so that you can get top market rent. You would then re-finance the loan. If you did it right, the home would appraise much higher than your purchased it for, and you could "pull out" all (or a portion of) your initial investment (down payment and rehab costs). If you get back all of your initial capital, then you have infinite returns on your investment... because you now, essentially, have $0 of your own money in the deal.

I have not done a BRRRR yet- although I plan to refinance one of my properties soon to test out the strategy. My reservation for doing so is twofold: 1) it will increase the monthly mortgage payment and 2) will I be over-leveraged when the next recession hits?

I invite critique/discussion of all I have posted here.  Again, I stress that I am a relatively new investor, still struggling to understand all the moving parts.