Should I cash out small ira

Question

Hi new here and this is my first post and hope to look back on this and see where it all started. My ? Is I have a small ira approx 7k the advisor says that I shouldn't take it out and pay penalties that could up to 40 percent including taxes claims It will earn 12% a yr but if I take and by a house that could cash flow at worst 200 a month wouldn't that earn me more. Looking for some opinions. Thank you in advance

William W. Humphrey · Answer

Keep in mind that there are a number of real estate investments that an IRA can make, some of which do not require a large cash amount.  Some investments that I have seen:

IRA partners as tenants-in-common with other investors (which can be pretty much any person or entity) on a property.

IRA originates a bridge loan or construction loan.

IRA purchases a fractional piece of an existing note.

IRA purchases an interest in an LLC that is investing in real estate.

The point being, even a smaller amount in an IRA can begin to create earnings in the real estate asset class.

Tom Ham · Answer

I agree with Mr. Humphrey, before cashing out, take a good look at how versatile an SD IRA is. It should only take an hour or so to consider it. I may have done things differently two years ago if I had known about them then. But, as I have said, the returns have far out paced the short term tax impact. I even back tested my IRA return versus the after tax return I get on that rental and there is simply no comparison. Either way, pull the trigger.

Cory O'Dell · Answer

You're throwing away money if you pull it out now. Let it go, let it grow, and forget it's even there. Save up to move forward with a rental in the future, but an IRA is still a great tool to build wealth and avoid taxes along the way.

Daniel Stanziale · Answer

@ Tom Ham don’t think it’s gonna affect my AGI that much since I already had a bump in income this year , would like not to have to think about it til i get that check at end of the month. Thanks i think i am just gonna pull the trigger and close it out and move forward.

Tom Ham · Answer

Daniel,

I agree that if the property acquired is cash flowing, you cant go wrong. Even though I got hit with a bigger penalty than expected because my AGI increased so much, the property cash flows really well and I have so few issues that forget its there until the first of the month! Good luck.

Daniel Stanziale · Answer

Y@ Basit Siddiqi   Good point I was planning a house hack but I have different answers about the 10% penalty that I would have to pay. I don’t mind paying the taxes on it because even after taxes I will still get every penny initially put into it. I’m not looking at it as losing what’s in there just getting back what I put in. If that makes sense

Daniel Stanziale · Answer

@Tom Ham. I originally called  advisor and wanted to self direct and not cash out but he said I would need a third party and that would cost  more so I figured I will just pay my taxes and penalties and put it to better use

Basit Siddiqi · Answer

@Daniel StanzialeYou may want to look into doing a house hack and using the IRA money towards the down payment.There is an exception that up-to $10,000 of IRA funds can be used for a personal residence without penalty.The distribution will still be subject to federal and state income taxes.

Tom Ham · Answer

I cashed one out years ago to purchase a mutli family that cash flowed very well so the penalty was a fraction of my first years ROI. HOWEVER, what I failed to realize is the withdrawal increased my adjusted gross income (AGI) and I ended up paying AMT. Still, no regrets as the ROI is well over 23% on that property. Since then I learned about self directed IRA's and that the way I do it now.

Daniel Stanziale · Answer

@  Trevor Ewen. If I take it out and only buy one rental that cash flows only $ 100 a month for the next say 5 yrs and loan pay down what would be worth more? Ira or house with equity and a cash flow?

Should I cash out small ira

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