Would you borrow from your roth for this investment?

Question

Off market deal

Purchase price 110k

20% down

1150 in rent

Market value as is 135k

$400 cash flow

19% cash on cash return

Now I don't have a huge savings in my Roth IRA, but I have enough to fund the rest of the down payment i need. Around 10k. Originally the seller was going to SF, but has since changed their mind. So my only option would be to finance through the bank. What am I going to pay in taxes for early withdrawal?

Thanks in advance!

Joe Splitrock · Answer

I am just curious why you sent out mailers if you didn't have a plan for money to do the deals? I am not trying to be a jerk saying that, just trying to point out you got what you wanted, don't mess it up. Based on what you said, I would do this deal. I would have no issue using Roth funds to do it. Low interest rates, below ARV, nice cash flow... Don't overthink it. Good luck.

Brian Ellis · Answer

The deal is under contract. Finally after some back and forth. We settled on a good price, with the seller covering some closing costs. I was able to talk her off the ledge after my Atty almost scared her away with a contract. Between both attys this deal was almost blown @Steve Vaughan  (learned my lesson).

First off market deal is underway, excited about this one!

Marty Sprong · Answer

@Doug Roux - my understating is that you can pull up to $100k penalty free (10%) regardless of you put it back. If it’s a Traditional you pick up the income but can spread it out over 3 years.  If within those 3 years you put it back (I assume you can put in less), you can amend you tax returns and get the tax you paid back. For a Roth, it’s similar but you are not taking anything into income to the extent they are roth contributions.  I am thinking about pulling out 100k myself for either my roth or traditional.

Brian Ellis · Answer

For the opportunity to get a SF deal, less money down, less closing costs, etc.

Also having the option to wholesale or pass on to another investor.

But fortunately the property cost is feasible with a 20% down payment, if I borrow from my Roth.

and thank you I appreciate the kind words

John Morgan · Answer

@Brian Ellis

I did this to buy my first real estate property 5 years ago. It was a 130k cash offer so I had to get creative with finding $. I took out 62k from our Roth IRAs. I only took out contributions, not any gains we made. So I didn’t have to pay a cent in tax. I still have 30k I can pull out tax free. I’m doing a major rehab right now and will probably pull out another 20k from our Roths which will be tax free.  The stock market is pretty high right now and I feel like I’m ahead of my goal with our Roth’s and my 401K. So why not tax some out to stoke my real estate investments. Good luck. Oh...and don’t forget to file a 1099R next year at tax time. I forgot to and the IRS came after me. But once I filed it and explained I only took out some of my contributions, they were fine with it and I didn’t owe any taxes.

Karah Collins · Answer

@Brian Ellis if it’s been 5 years since you last contributed and you’re under 59 1/2, you are allowed to withdraw investment plus up to 10,000 worth of the gains for a first time home purchase. Fortunately they’re pretty loose with “first time home purchase”, as I believe it’s a mandatory two years since you last bought a property.

I don’t know that I would withdraw from my Roth for the particular deal that you’ve found, but I do think that withdrawals have their place when the deal is good. Especially since it’s looking like Wall Street may soon be reflecting the realities of Main Street.

I would personally leave the 401k loan unless it was a small amount 10k or under.  Not worth the early withdrawal penalty if a larger amount cannot be paid back in the allotted time due to the plethora of circumstances out of our control these days.

Brian Ellis · Answer

Thank you, Steve

I appreciate the words of encouragement!

Ya, what a buzzkill from the lawyer. Said my down payment wouldn’t be enough to cover the “foreclosure process”. Do foreclosures really cost more than 10k? 780 credit score and three houses always paid on time over three years wasn’t enough to convince her. Oh well, still excited None the less.

Andrew Pongyan · Answer

@Brian Ellis I’ve take 2 401k loans to fund real estate deals. This way you can avid the early withdrawal fee .

Karah Collins · Answer

@Brian Ellis

Also in reference to 401k. It’s traditionally “bad form” to pull from retirement accounts but imo this assumes the economy is in great shape and that you’re missing out on market gains while utilizing the cash elsewhere.

If you can set a tight timeline to pay the $$$ back, I say why not. To my knowledge (which could be wrong), you will be paying the loan back with pretax dollars and will only be double taxed on the interest. If you pay back the loan super quickly, this dollar amount is usually a couple hundred dollars max depending on your tax bracket.

I definitely did something similar to you very recently, and while I would not shout it from the rooftops as best practice, I feel good about my decision and feel I was well informed when making it.

Doug Roux · Answer

@Brian Ellis. I believe the new stimulus package allows you to withdraw up to $100,000 from your IRA and then repay it within 3 years with no penalty.   Also no taxes.   I would look into that.

Would you borrow from your roth for this investment?

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