Using the Principle of a Roth IRA

[Alejandro Alcantara]

Greetings, I am new investor just getting in the game and trying to raise my own capital (not into hard/private lending at this point). I am secure with my pension and 457(b) plan that I don't plan on touching (still have a ways to go before retiring). I do have an Roth IRA that has been sitting in an account for years ($36K) going nowhere (i.e. not contributing to). There is talk about using the principle without being penalized. I received the transcripts from American Funds and it actually shows "the contribution" and then any "dividend, interest, or capital gains" earned on that principle. Although the transcript ends in 2003 I have bank statements showing contributions up until 2006. My question is can I use this information to pull out the principle? If so, has anyone done so and how did they do it? Was it matter of just calling the brokerage firm and providing the paperwork or is their other hoops to jump through? As a newbie taking the baby steps and making sure the math is right before going all in I would really appreciate any feedback. Thank you.

[Lore Postman]

Hi Alejandro, 

Why not leave the money in the Roth IRA and use it to fund your purchases? You'd need to set up a self-directed IRA and follow the rules, but the benefit is that your investment would continue to grow within the Roth.

Let's say that you use a portion of your $36k Roth as a down payment on a rental property purchase. (You wouldn't want to use the entire amount, since you'd need money in reserves for repairs or unexpected expenses). Over time, the rental income would pay off the mortgage and the entire property would be held within the Roth. One day you'd be able to put those rent payments right into your own pocket without having to pay taxes on them. And you could sell the property without needing to do a 1031 exchange (because the proceeds would go back into the Roth). 

To be sure, there are very specific rules when it comes to self-directed IRAs. You'll want to follow them carefully. But the fact that you have that much money within a Roth is a wonderful gem that you'll want to protect and take advantage of. I think keeping the money inside the Roth will be more valuable to you than taking out your original contributions.