Cashing out Roth IRA for REI?

Question

Hello everyone,

I just wanted to ask a question about using the funds from my Roth IRA towards the purchase of property. I've done some calculations and realized that my Roth IRA is yielding some horrible rates of return. Due to the recent dip in the market, I lost all of the gains since this time last year. I understand the market will climb back up but it's way too violate to depend on a good rate of return. Also, if I withdrawal my funds, I will incur a 10% penalty fee for taking it out too early. Even though I would incur that penalty, based on what I've calculated, I would still be able to cover that loss with at least a few months of cash flow from a rental.

What do you guys think?

Dmitriy Fomichenko · Answer

@Amaf J.

you can also convert your Roth IRA into self-directed and invest in real estate or do private lending out of that and grow your wealth tax-free. After you reach retirement age you can just take out the rental income or interest payment without touching principals. This way you can have tax-free income stream for the rest of your life and then pass one some of your wealth to the next generation. Roth IRA can be very powerful tool in your overall wealth building strategy.

Steve Vaughan · Answer

If you decide to go this route, you should be able to withdraw your contributions penalty-free. I have withdrawn some contributions in the past to fund a purchase, but not all of it. I'm a believer in multiple streams of income, so I would be hesitant to kill the whole Roth.

We also don't want to sell low, right? A well-timed exit during the slow season of RE may be a move to consider @Amaf J.!

We also don't want to sell low, right?  A well-timed exit during the slow season of RE may be a move to consider @Amaf J.!

Michael Lauther · Answer

@Amaf J. I currently use Equity Trust as the custodian for my self directed IRA. I own rental property inside my IRA because that's where my money was tied up an I did not want to cash out and pay tax.

Mark Nolan · Answer

@Amaf J.

In addition to transferring the existing Roth IRA to a self-directed Roth IRA and then investing it in physical real estate, if you decided to cash out the Roth IRA, you would only pay the 10% early distribution penalty on the earnings not the basis.

Amaf J. · Answer

@Steve Vaughan, well said, I'll look into that and see if I qualify for a penalty-free withdrawal. I also plan on selling once the market climbs back up to where I was seeing my gains from last month. I don't plan on killing the entire Roth idea but I'm thinking it's a better option to acquire more property than it is to have this money slowly compound over 30 years.

Account Closed · Answer

You can withdraw Roth contributions penalty free, but if you withdraw any earnings on those contributions you will incur the 10% penalty.

Amaf J. · Answer

@Mark Nolan, thanks for that list of companies but which one would you recommend? I looked at their reviews and a lot of people are complaining about poor customer service and the lack of ability to move funds to other companies in the future.

@Dmitriy Fomichenko, sounds good. Now I can only roll over a 401k from a previous employer, right? I was hoping to roll over the funds with my current employer. Also, all the money I contribute to my 401k now is funded and matched after-tax.

Dmitriy Fomichenko · Answer

Amaf, there are no capital gain taxes inside of SD IRA - all of the gains, incomes and profits are sheltered from taxes because it's a tax-deferred account. You'll pay ordinary income taxes on distributions only.

Like Mark said past employer 401k can be rolled over into self-directed IRA, but you will need a new account in addition to self-directed Roth IRA, because one is pre-tax and the other one is post-tax. If you have 401k with the current employer - they will not allow you to roll that over while you are employed there.

Mark Nolan · Answer

@Amaf J.

There are ample self-directed IRA custodians throughout the country and some include the following.

IRA Services Trust Company

Pensco Trust Company

Equity Trust Company

Millenium Trust Company

Sunwest Trust

1. Earnings on a self-directed Roth IRA are only subject to taxes and penalties if you take distributions of earnings before you have had the Roth IRA for at least 5 years and if you are under age 59 1/2.

2. The rental income flows back to the ROTH IRA because the Roth IRA owns the rentals.

3. Yes a former employer plan such as a 401k can be transferred to a self-directed IRA.

Amaf J. · Answer

@Dmitriy Fomichenko@Mark Nolan Do you guys have any suggestions on where I can find these self-directed IRAs? Also, any funds transferred to the self-directed IRA can be used to purchase real estate but I'm only taxed on the capital gains when cashed out? What happens with the cash flow from rentals? Also, can I roll over my employers 401k to a self-directed IRA?

Cashing out Roth IRA for REI?

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