Withdraw Retirement to Fund Real Estate

10 Replies

Wanted to get people's thoughts on withdrawing from my Roth retirement accounts (and taking the 10% penalty) in order to invest in real estate? I've been using the BRRRR method to purchase properties and know that my cash-on-cash return will far exceed market returns. Along with appreciation, debt paydown, and tax benefits of real estate, to me it seems like a no-brainer. However, wanted other folks opinion?

As an FYI, I'm aware of self-directed IRAs; however, that strategy does not align with my current real estate goals.

@Matthew Hite My thoughts are counter to what maybe 98% of the people on BP think.  I'm a fan of diversification so I don't want 100% of my money in any single asset class.  So paying a 10% penalty (for me) to withdraw money from a retirement account to invest in real estate doesn't make sense.  

Things like a 10% penalty really represent a catch-22.  If the 10% penalty isn't "a lot of money" then you probably don't have a lot to withdraw, so why do it?  If the 10% is "a lot of money" to you then you won't want to give it up.

I agree with @Andrew Johnson the penalty is very high and many investors would be happy to earn 10% on their money and you are considering basically throwing that guaranteed 10% away. I think that there may be other options that don't include paying the penalty if you are dead set on using retirement funds to invest in real estate such as a loan secured by your 401k if you have one or as you mentioned the self directed IRA option.

Thanks for your input... I do agree with the idea of diversification between stocks/real estate. I should also caveat that since the majority of my retirement accounts are Roth, only the profits will be penalized as my contributions within the retirement account would be withdrawn tax and penalty free. Realistically, the amount that I'd be paying in fees would only be only a couple percent of the total contribution. The main issue is losing out on the tax advantage that the Roth IRA provides.

Additionally, the purpose of withdrawing the money would not be to just park the money into a couple properties.  The goal with the funds would be to begin building a full-time business in flipping and rehabbing.

Originally posted by @George Blower :

@Matthew Hite

I would not distribute my Roth funds since all the gains grow tax free.

 Even if returns on real estate are 2 or 3 times that of what you're earning by investing in the market?

Do it @Matthew Hite . I like the idea of having control of my money. You give up control dropping it in the Roth. I believe RE is a better investment in the long run. That being said, maybe start by taking out only your contributions, leaving the gains, thus no penalty. Put that money to work. If down the road you need more, then deplete the balance of the Roth. Cheers.

I think you should consider stopping your retirement contributions immediately. Then continue saving that contribution plus every dollar you can scrap together and use that to start real estate investing. It is not worth the penalty to withdraw the money already invested imo. Also if you are starting from be beginning with real estate you will be at a learning curve initially and not get in over your head right away.

@Matthew Hite the Roth lets your money grow and be withdrawn tax free. Who knows what the taxes will be in 20 or 30 years, but I am 99% confident the tax rates will be much higher. It is also possible some real estate tax advantages could be taken away in the future, which is why diversification is a good idea.

Retirement accounts are largely sheltered from bankruptcy and divorce. Maybe you are not expecting either to happen, but statistics say it easily could. It sure would be nice to have a few bucks stashed away for your golden years in the event something bad happens.

I max out my Roth contributions every year just because it is an amazing tax protection investment. Also to be honest, the market returns the last three years have been excellent for a totally passive investment.

Flipping is a high tax business and it is hardly passive, kind of the opposite of a Roth.