Withdraw money from IRA for down payment to start REI?

[Adam Merrill]

Hi BP Community,

Would you withdraw money from an traditional IRA account to fund a down payment on a multi-family? I recently made a career change and rolled my 401k into an IRA and started a new 401k with my new employer to take advantage of the employer match program.

I am debating withdrawing funds, around 20% of the IRA plans current market value. I understand the tax implications in doing so, but is the short term loss worth the long term gain?

[Steve Hall]

@Adam Merrill Welcome to BP!

If you have over 50k in your IRA, then you should do a self directed IRA. (There are plenty of SDIRA gurus on here who can help you with that.) If you're a long way from retiring, not in a high tax bracket, then sure, you can take out some money, pay the 10% penalty and then pay income tax it.

If you had left the money in the 401k, you could have borrowed up to $50k from it. :(

[Mike Freske]

@Adam Merrill

Agreed, a self-directed 401(k) could be a good idea, then you could take a loan out against your funds.

Can you take a loan out with your current employer? If you made a recent job change, you couldn't have taken a loan our before rolling it over. 

[Dmitriy Fomichenko]

In addition to being taxed on the distribution you would have to pay the penalties, in some cases depending on the amount and tax bracket I've seen folks lose 40-50% of the amount they pull out. May not be wise financial move.

Certainly can rollover into self-directed IRA, which can be used to invest in real estate. Self-directed 401k would only work if you are self-employed. 

[Taylor L.]

I think the most important question is "what's your long term goal?"

If you're a young person who is 100% dedicated to being a real estate entrepreneur, pulling the money out could be decent seed capital for starting your investment business.

If you're a bit older and just looking to grow your net worth, doing a self directed account and not taking the massive hit probably makes more sense. The tax hit can be a lot to make up right off the bat.

Personally, I have converted most of my old 401(k)s to a Self Directed IRA, and I use that to invest in multifamily and self storage syndications. We've beaten the market, and I get to passively invest in addition to the active investing I do.

If you'd like to discuss more specifics re: my experiences with this (pros and cons) just shoot me a connect & PM and we'll talk.

[Ronak Shah]

@Adam Merrill, others have already chimed in rightly about using Self-directed IRA for this. However, remember you can't personally guarantee loans for IRA so you would be able to use the funds to use in others' ventures but I don't think you can use those funds to leverage. @Dmitriy Fomichenko, am I right?

[Dmitriy Fomichenko]

@Ronak Shah you are correct, the IRA account owner considered "disqualified person" to his/her IRA and as such not allowed to provide personal guarantee for the loan to the IRA. For this reason the loan must be non-recourse. There are lenders specializing in these types of loans to retirement account, here is a list:

https://www.biggerpockets.com/blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401k

[George Blower]

@Adam Merrill

Another consideration not mentioned here is whether you intend to invest on a passive basis. For example, if you invest via an IRA or Solo 401k, you can't work on the property (e.g., can't mow the grass, paint, etc.).

[Justin Windham]

@Adam Merrill

Did you decide what to do with your IRA funds? A self-directed IRA or 401k provides some flexibility, but you cannot use the earnings immediately- they would belong to the retirement account which you could draw from later on.