CARES Package allows IRA withdrawals w/o 10% penalty, worth it?

8 Replies

With the passage of the CARES package allowing IRA withdrawals without the 10% penalty and being able to report the distribution evenly over 3 years, I have been considering taking $20k out of my IRA to pay off a loan that is keeping my DTI above 45% and preventing me from qualifying for an FHA loan with a loan amount enough to purchase in Socal. I have excellent credit, no debt besides student loans with a manageable payment and have been in my industry for over 10 years. However, every article I read says it's not advisable to take from an IRA. However, I would like to hear what BP has to say. Would taking from my IRA at this time be advisable to start my REI career? Thanks in advance!

@Angelica Morales

You have up to 3 years to pay it back. If you do as you suggest -pay off the existing loan, buy a rental property, make passive income,take depreciation and pay back the Ira with the proceeds within 3years it could be a good start in real estate. You would have lost 3 years or so on building your Ira. You would also be responsible for paying the tax on the distribution if you didn’t pay it back . Not horrible but certainly not good but maybe worth it.

The other suggestion would be to buy the real estate in your Ira where your DTI is not considered when the Ira establishes a non recourse loan. Then you have your real estate start and are earning tax free or tax deferred income for life.

Now you have options.

You also would be withdrawing from your IRA when the stock market is extremely low. At this point it is likely the returns of in then stock market could be higher than your real estate investment over the next 3yr and it is 100% passive.

If you really want to use your IRA to invest in real estate I would let the market rebound and then invest via a self IRA as @Carl Fischer Said above.

personally, I like the diversification of having my IRA in the stock market and my real estate investments separate.

@Angelica Morales I agree with 100% of what @Randy Bloch stated above with one possible exception.

If the IRA has enough in bonds (or other asset classes that have not fallen as much) and you wanted to distribute that to start RE investing it could still be a good move. In this scenario you would be adding in a lot more risk, however, so make sure you are in a strong financial position before jumping into real estate.

The main problem I have with people using retirement funds for real estate is that is is often done by people with very little or even no real estate experience. In general I advise against people using retirement funds for real estate unless they are experienced real estate investors that have done at lease a couple of deals.

Is your salary cut related to economy or covid...then I am sure you could. That does not mean it is a good idea. I would make this last resort and with a 30% pay cut seems there is probably a way to figure out how to make it without an IRA withdrawal.

I would ask how much would be left in your IRA after withdrawing 20k? Is Investing in Real Estate the end goal or just a tool to get you to FI more quickly?

Consider your priorities, assess your risk tolerance according to your decision making, and move forward. 

Would taking money out of your IRA in order to pay down a debt, in order to improve your DTI, be a wise move? Would minimizing your personal debt, therefore lowering your monthly payments, therefore increasing your saving potential, be the right move for your overall position, before moving into real estate?

That process, in my opinion, of improving your overall financial position, is far more important than an extra few thousand sitting in an IRA(you can get that back quickly with a little planning). Or you could just leave it there, go military on that debt over the next few months, cut your lifestyle in half, no spending, no entertainment, no luxuries, just paying down debt and eating peanut butter and jelly sandwiches, and improve your position that way. (99% of people won't do this, and I can't blame them)

I currently moved funds from a Rollover IRA into a much more liquid position, for any opportunities in the near future. Whatever you decide will be the right decision, I would just know your "why"!

Best of luck!

@Scott Jensen

I want to give you a big virtual hug as you hit the nail on the head with everything you stated and I agree 100%. I see many people bragging about being able to do this to buy real estate right now which is at its peak, will most likely go down and if you cannot pay it back you are upside down on it and probably cannot refinance and you are losing tax deferred growth

It’s really no different than taking a normal loan from your retirement as there you are not taxed nor pay penalty (but do pay interest to yourself). Most also say that is a bad idea unless you absolutely have too. I would say same applies here.