Cash out IRA for REI??

16 Replies

I am 30 years old with 75k in my IRA (not a current employer 401k program). Should I cash out what I can to purchase a multi unit investment property for buy and hold? Thanks.

Hold on there, sparky. Is this a Roth IRA or traditional? You can pull out contributions to a ROTH tax and penalty-free. The penalty is 10% + your tax rate on a traditional. The penalty in 10%, not the tax. This isn't a game of horseshoes where close counts.

In general, the answer is NO.  Even with a tax/penalty free ROTH distribution, you will be giving up 30+ years of tax-free growth.  I would not 'borrow' at a rate of 35+% to scratch my RE itch.  Save up and find the money elsewhere.  I think you'll be glad you did when you look back @Sean Connolly Cheers!

the penalty is 10%, but what is the IRA's return in the last year?

right now the penalty woudl be $7,500 so you would only have 67,500 to start. But if the IRA is doing well, why not roll it to a self directed IRA. then if/when the returns slow down you can utilize more effectively for investment purposes. there are limits and I suggest you speak with a Self Directed IRA custodian for those.

Originally posted by @Dale Stevens :

the penalty is 10%, but what is the IRA's return in the last year?

right now the penalty woudl be $7,500 so you would only have 67,500 to start. 

It will be less than 67,500 by the time taxes are paid. But agreed, a self-directed IRA would be the only way to do this, rather than cash out. Guidant Financial is an example of a company that does this.

I stand corrected sir. Yes there is the penalty, but then also the taxes to be paid back on "pre-taxed" savings money. I had forgotten that part entirely.

Don't take money out and pay penalty just to "get in the game"

Options:

- If you're not in a hurry, you can roll the IRA into a ROTH. After 5 years you can withdraw it as if it were a regular ROTH contribution penalty and tax free. If you're only 30, you should do this regardless of whether you're going to invest in real estate or not. Talk to a tax specialist to figure out how to best do this conversion at your income level (the conversion amount counts towards taxable income for the year).

- If you're going to live in the property, you can withdraw 10k from the IRA penalty-free to put as down payment for primary residence.

- You can borrow from the IRA (I think 10k) and pay it back within 120ish? days without penalty.

Thanks for the responses. Just bothers me a bit that I have this cash sitting in my IRA that I won't be able to touch for three decades (hopefully I'm even alive and well at that point).
Sean Connolly Why don't you roll the money into a self directed IRA? No taxes no penalties. You can then use that money to invest in real estate. Yes you can't touch the money until you retire. However all your profits grow tax free until you start to take withdrawls. And (assumption) if you have kids or are planning to, you can withdraw the money tax free to pay for thier college.

@Sean Connolly yea I wouldn't touch it...its patience money, it's not worth the penalties and taxes that will be incurred.  

I look at it this way if you are in the 25% tax bracket and will pay a 10% penalty for an early withdraw you are paying $26K to use this money and there are no guarantees that you would make it back.  

@Sean Connolly

If it's a traditional IRA, it's not just a 10% penalty. You must also claim $75,000 of ordinary income on top of anything else you already earn. Assuming a 25% tax bracket for example purposes, you'd be looking at a total of 35% or $26,250 in taxes.

A self directed IRA can purchase real estate directly but there are certain rules that apply. Search the BP forum or check out my BP blog where I discuss real estate investments in an IRA.

Best of luck!

Originally posted by @Frank Jiang :

- You can borrow from the IRA (I think 10k) and pay it back within 120ish? days without penalty.

Not to throw Frank under the bus but his statement above isn't accurate. You cannot borrow against your IRA. However, you can roll funds from IRA to IRA once every twelve months using a 60-day rule. New IRS rules in 2015 state that you can only do this once across all IRA accounts.

To learn about the new one per every 12 month IRA rollover rule visit:

Internal Revenue Service (IRS) Announcement 2014-15

Originally posted by @Sean Connolly :
Thanks for the responses. Just bothers me a bit that I have this cash sitting in my IRA that I won't be able to touch for three decades (hopefully I'm even alive and well at that point).

Another option is to set up an LLC and a SEP/SOLO 401k (I forget which one, talk to a broker, I use Fidelity) and roll your IRA into the new account. You should then be able to give yourself a loan of 50% the total balance up to $50k. So with your current IRA, you could probably get around $37k or so. Not a ton, but might be enough to get you started, plus keep some money in the market.

If you have a 401k through your W2 position, you can do the same thing. If you search the forums you'll get a couple schools of thought. One that says no way, dont touch your 401k/IRA and another that says absolutely. I tapped my 401k for my first deal. Pulled out $42k, put back $42k in six months plus a bunch more in my cash account.

Originally posted by @Scott Lewis :
Originally posted by @Sean Connolly:
Thanks for the responses. Just bothers me a bit that I have this cash sitting in my IRA that I won't be able to touch for three decades (hopefully I'm even alive and well at that point).

Another option is to set up an LLC and a SEP/SOLO 401k (I forget which one, talk to a broker, I use Fidelity) and roll your IRA into the new account. You should then be able to give yourself a loan of 50% the total balance up to $50k. So with your current IRA, you could probably get around $37k or so. Not a ton, but might be enough to get you started, plus keep some money in the market.

SEP IRA does not offer the ability to take a loan against it. But Solo 401k does. However, not everyone can qualify for a Solo 401k. In order to establish this retirement plan you need to own a small business without full time employees other than yourself and your spouse or generate some self-employment income (can be full time or part time and in addition to full time job). Solo 401k can also be self-directed, which would give you the ability to invest your retirement funds into alternative assets such as real estate and have checkbook control over your retirement account (assuming you set up truly self-directed Solo 401k). All these and number of other benefits in addition to being able to access your retirement funds via loan prior to retirement. Overall great option, but again, if you qualify.

I'm with @Jeanette A.

 just keep it in a self-directed and now you have the opportunity for great investing and are "forced" to not touch the cash flow. 

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