Cash out IRA for REI??

Question

Dmitriy Fomichenko · Answer

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.

Scott Lewis · Answer

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.

Steve Vaughan · Answer

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!

Mark Shaffar · Answer

I'm with Account Closed

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.

Mark Nolan · Answer

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

Internal Revenue Service (IRS) Announcement 2014-15

Loren Whitney · Answer

@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!

Frank Jiang · Answer

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.

Loren Whitney · Answer

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.

Angel Rosado · Answer

@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.

Cash out IRA for REI??

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