Would you borrow from your roth for this investment?

19 Replies

Off market deal

Purchase price 110k

20% down

1150 in rent

Market value as is 135k

$400 cash flow

19% cash on cash return

Now I don't have a huge savings in my Roth IRA, but I have enough to fund the rest of the down payment i need. Around 10k. Originally the seller was going to SF, but has since changed their mind. So my only option would be to finance through the bank. What am I going to pay in taxes for early withdrawal?

Thanks in advance!

@Brian Ellis

I'd explore private money before I explored paying penalties and taxes. Are you under contract? If seller agreed and then pulled back, I'd counter with a price reduction since your cost of capital increases. If Roth was my last chance at capital, I would not draw for this deal, but my markets are different. I'm assuming you could find a few deals a year with those types of returns...

@Brian Ellis   (Disclaimer, I'm not an accountant).   : )

If you only take out what you put in, I believe you are subject to 10% hit on that but no tax penalty.  If you take out what you earned in the ROTH, you are taxed at your normal rate on that amount, plus the 10%.  Normally I don't suggest pulling from a retirement account to fund a deal (especially if it's your first deal), but since we are only talking about $10k, I'm less opinionated on that part. A deal is a deal is a deal right, so if the numbers make sense, and you are confident in those numbers then where the money comes from is up to you I think.  It sounds like you are going to get a much higher return for that $10k than your Roth is likely to give you, so all you are really losing (other than fees and/or taxes) is the earning power of that $10k in your Roth to grow tax free. 

Best of luck! 

@Brian Ellis withdrawing your contributions from your Roth IRA is tax and penalty free. It gets more complicated if you exceed the amount of your contributions and start dipping into your gains. So just be careful there. Looks like a nice deal from the numbers you laid out. Good luck!

Originally posted by @Todd Rasmussen :

@Brian Ellis

I'd explore private money before I explored paying penalties and taxes. Are you under contract? If seller agreed and then pulled back, I'd counter with a price reduction since your cost of capital increases. If Roth was my last chance at capital, I would not draw for this deal, but my markets are different. I'm assuming you could find a few deals a year with those types of returns...

Not necessarily. It is very hard to find any deals over the past few years where im from, let alone a house under 250k. Sent out direct mailers and got a bite, and fortunately it was within my price range.  

No p&s has been signed yet, but seller is working on that now with their ATTY.

 

Originally posted by @David Lorenz :

@Brian Ellis withdrawing your contributions from your Roth IRA is tax and penalty free. It gets more complicated if you exceed the amount of your contributions and start dipping into your gains. So just be careful there. Looks like a nice deal from the numbers you laid out. Good luck!

Thank you, yes I would be dipping into my earnings unfortunately. Ive reached out to my CPA so see what penaltys im looking at.

 

Originally posted by @Jon Crosby :

@Brian Ellis  (Disclaimer, I'm not an accountant).   : )

If you only take out what you put in, I believe you are subject to 10% hit on that but no tax penalty.  If you take out what you earned in the ROTH, you are taxed at your normal rate on that amount, plus the 10%.  Normally I don't suggest pulling from a retirement account to fund a deal (especially if it's your first deal), but since we are only talking about $10k, I'm less opinionated on that part. A deal is a deal is a deal right, so if the numbers make sense, and you are confident in those numbers then where the money comes from is up to you I think.  It sounds like you are going to get a much higher return for that $10k than your Roth is likely to give you, so all you are really losing (other than fees and/or taxes) is the earning power of that $10k in your Roth to grow tax free. 

Best of luck! 

Thank you! Do you happen to have any idea what the taxes/penalties would be on taking out my earnings?

 

Originally posted by @Brian Ellis :
Originally posted by @Todd Rasmussen:

@Brian Ellis

I'd explore private money before I explored paying penalties and taxes. Are you under contract? If seller agreed and then pulled back, I'd counter with a price reduction since your cost of capital increases. If Roth was my last chance at capital, I would not draw for this deal, but my markets are different. I'm assuming you could find a few deals a year with those types of returns...

Not necessarily. It is very hard to find any deals over the past few years where im from, let alone a house under 250k. Sent out direct mailers and got a bite, and fortunately it was within my price range.  

No p&s has been signed yet, but seller is working on that now with their ATTY.

Sounds like this is worth more consideration than I would give it. As long as you go into it objectively and aware of the ramifications, you'll be alright. Just don't forget to diversify again on the back end.

Originally posted by @Brian Ellis :
Originally posted by @Todd Rasmussen:

@Brian Ellis

I'd explore private money before I explored paying penalties and taxes. Are you under contract? If seller agreed and then pulled back, I'd counter with a price reduction since your cost of capital increases. If Roth was my last chance at capital, I would not draw for this deal, but my markets are different. I'm assuming you could find a few deals a year with those types of returns...

Not necessarily. It is very hard to find any deals over the past few years where im from, let alone a house under 250k. Sent out direct mailers and got a bite, and fortunately it was within my price range.  

No p&s has been signed yet, but seller is working on that now with their ATTY.

 

I am just curious why you sent out mailers if you didn't have a plan for money to do the deals? I am not trying to be a jerk saying that, just trying to point out you got what you wanted, don't mess it up. Based on what you said, I would do this deal. I would have no issue using Roth funds to do it. Low interest rates, below ARV, nice cash flow... Don't overthink it. Good luck.

Originally posted by @Joe Splitrock :
Originally posted by @Brian Ellis:
Originally posted by @Todd Rasmussen:

@Brian Ellis

I'd explore private money before I explored paying penalties and taxes. Are you under contract? If seller agreed and then pulled back, I'd counter with a price reduction since your cost of capital increases. If Roth was my last chance at capital, I would not draw for this deal, but my markets are different. I'm assuming you could find a few deals a year with those types of returns...

Not necessarily. It is very hard to find any deals over the past few years where im from, let alone a house under 250k. Sent out direct mailers and got a bite, and fortunately it was within my price range.  

No p&s has been signed yet, but seller is working on that now with their ATTY.

 

I am just curious why you sent out mailers if you didn't have a plan for money to do the deals? I am not trying to be a jerk saying that, just trying to point out you got what you wanted, don't mess it up. Based on what you said, I would do this deal. I would have no issue using Roth funds to do it. Low interest rates, below ARV, nice cash flow... Don't overthink it. Good luck.

For the opportunity to get a SF deal, less money down, less closing costs, etc.

Also having the option to wholesale or pass on to another investor. 

But fortunately the property cost is feasible with a 20% down payment, if I borrow from my Roth.


and thank you I appreciate the kind words

@Brian Ellis if it’s been 5 years since you last contributed and you’re under 59 1/2, you are allowed to withdraw investment plus up to 10,000 worth of the gains for a first time home purchase. Fortunately they’re pretty loose with “first time home purchase”, as I believe it’s a mandatory two years since you last bought a property.

I don’t know that I would withdraw from my Roth for the particular deal that you’ve found, but I do think that withdrawals have their place when the deal is good. Especially since it’s looking like Wall Street may soon be reflecting the realities of Main Street.

I would personally leave the 401k loan unless it was a small amount 10k or under. Not worth the early withdrawal penalty if a larger amount cannot be paid back in the allotted time due to the plethora of circumstances out of our control these days.

@Brian Ellis

Also in reference to 401k. It’s traditionally “bad form” to pull from retirement accounts but imo this assumes the economy is in great shape and that you’re missing out on market gains while utilizing the cash elsewhere.

If you can set a tight timeline to pay the $$$ back, I say why not. To my knowledge (which could be wrong), you will be paying the loan back with pretax dollars and will only be double taxed on the interest. If you pay back the loan super quickly, this dollar amount is usually a couple hundred dollars max depending on your tax bracket.

I definitely did something similar to you very recently, and while I would not shout it from the rooftops as best practice, I feel good about my decision and feel I was well informed when making it.

Originally posted by @Brian Ellis :

Off market deal

Purchase price 110k

20% down

1150 in rent

Market value as is 135k

$400 cash flow

19% cash on cash return

Now I don't have a huge savings in my Roth IRA, but I have enough to fund the rest of the down payment i need. Around 10k. Originally the seller was going to SF, but has since changed their mind. So my only option would be to finance through the bank. What am I going to pay in taxes for early withdrawal?

Thanks in advance!

So close to your first SF deal, Brian.  I'm still excited for this DM deal for you. 

She may change her mind after talking to her accountant, unless it's been inherited.  On larger $ assets, there are def tax advantages to spreading the burden out with SF if not exchanging.

My wife and I did a $30k Roth withdrawal in '05. 5yr contributions only so no tax or penalty. Best decision. That property now has over $600k in equity. The $30k may have grown to $100k If stayed in the market.

I don't think you'll have a 10% penalty during  this covid period but gains will be taxed as ordinary income as far as I know.  Probably not a big financial hit but you'll have to fill out the early withdrawal forms correctly EOY.

Sounds like a great deal.  I would have tried to get it under contract prior to her attorney visit for sure.  They screw up deals IME.  Keep us posted bud!

Originally posted by @Steve Vaughan :
Originally posted by @Brian Ellis:

Off market deal

Purchase price 110k

20% down

1150 in rent

Market value as is 135k

$400 cash flow

19% cash on cash return

Now I don't have a huge savings in my Roth IRA, but I have enough to fund the rest of the down payment i need. Around 10k. Originally the seller was going to SF, but has since changed their mind. So my only option would be to finance through the bank. What am I going to pay in taxes for early withdrawal?

Thanks in advance!

So close to your first SF deal, Brian.  I'm still excited for this DM deal for you. 

She may change her mind after talking to her accountant, unless it's been inherited.  On larger $ assets, there are def tax advantages to spreading the burden out with SF if not exchanging.

My wife and I did a $30k Roth withdrawal in '05.  5yr contributions only so no tax or penalty.  Best decision.  That property now has over $600k in equity. The $30k may have grown to $100k If stayed in the market. 

I don't think you'll have a 10% penalty during  this covid period but gains will be taxed as ordinary income as far as I know.  Probably not a big financial hit but you'll have to fill out the early withdrawal forms correctly EOY.

Sounds like a great deal.  I would have tried to get it under contract prior to her attorney visit for sure.  They screw up deals IME.  Keep us posted bud!

Thank you, Steve

I appreciate the words of encouragement! 

Ya, what a buzzkill from the lawyer. Said my down payment wouldn't be enough to cover the "foreclosure process". Do foreclosures really cost more than 10k? 780 credit score and three houses always paid on time over three years wasn't enough to convince her. Oh well, still excited None the less.

 

Originally posted by @Karah Collins :

@Brian Ellis

Also in reference to 401k. It’s traditionally “bad form” to pull from retirement accounts but imo this assumes the economy is in great shape and that you’re missing out on market gains while utilizing the cash elsewhere.

If you can set a tight timeline to pay the $$$ back, I say why not. To my knowledge (which could be wrong), you will be paying the loan back with pretax dollars and will only be double taxed on the interest. If you pay back the loan super quickly, this dollar amount is usually a couple hundred dollars max depending on your tax bracket.

I definitely did something similar to you very recently, and while I would not shout it from the rooftops as best practice, I feel good about my decision and feel I was well informed when making it.

Good luck with the deal! Thanks for the advice  

@Brian Ellis

I did this to buy my first real estate property 5 years ago. It was a 130k cash offer so I had to get creative with finding $. I took out 62k from our Roth IRAs. I only took out contributions, not any gains we made. So I didn't have to pay a cent in tax. I still have 30k I can pull out tax free. I'm doing a major rehab right now and will probably pull out another 20k from our Roths which will be tax free. The stock market is pretty high right now and I feel like I'm ahead of my goal with our Roth's and my 401K. So why not tax some out to stoke my real estate investments. Good luck. Oh...and don't forget to file a 1099R next year at tax time. I forgot to and the IRS came after me. But once I filed it and explained I only took out some of my contributions, they were fine with it and I didn't owe any taxes.

@Doug Roux - my understating is that you can pull up to $100k penalty free (10%) regardless of you put it back. If it’s a Traditional you pick up the income but can spread it out over 3 years. If within those 3 years you put it back (I assume you can put in less), you can amend you tax returns and get the tax you paid back. For a Roth, it’s similar but you are not taking anything into income to the extent they are roth contributions. I am thinking about pulling out 100k myself for either my roth or traditional.