IRA funds as down payment

[Brad Kanouse]

Hello. Is there a way to utilize part of my Traditional IRA funds as a down payment on a SFH investment property without being penalized?

[Nicholas L.]

@Brad Kanouse

no reason to do this.  interest rates and prices are high and people are contorting themselves into pretzels to try to buy.  if you don't have enough cash for a down payment... save up until you do

[Dmitriy Fomichenko]

@Brad Kanouse,

I believe this is a duplicate of this post:
https://www.biggerpockets.com/forums/311/topics/1210256-usin...

But regardless, here is my answer:

If you take a distribution from an IRA - it will be subject to taxes and penalties.

You can convert your IRA into a "Self-directed IRA" and have the IRA buy the property, in this case you are not the owner, the IRA is. You won't be able to use conventional financing and must use a non-recourse loan which typically require 40% down. Also be aware of Unrelated Business Income Tax (or UBIT) on leveraged real estate inside of an IRA.

Or better yet, since you are self-employed - go with a truly self-directed Solo 401k plan, which would be a much better option and will help you avoid the UBIT on this investment.

[Arthur Flores]

Yes, you can use part of your Traditional IRA funds for a down payment on a home through the First-Time Homebuyer Exception, which allows you to withdraw up to $10,000 without incurring the 10% early withdrawal penalty. Here are the key points:

- First-time homebuyer: You qualify if you (and your spouse, if applicable) haven’t owned a home in the past two years.

- Lifetime limit: The $10,000 is a lifetime limit, meaning you can only use it once for this purpose.

- Taxes: While the 10% penalty is waived, the withdrawn amount will still be subject to regular income taxes.

This can be a useful way to access funds for a home purchase, but keep in mind the tax implications and the potential impact on your retirement savings.

[Brad Kanouse]

Thank you all! This is great information. I appreciate you taking the time to respond.

[Josh St Laurent]

@Brad Kanouse

You've gotten some good info so far from Arthur and Dmitriy and I wanted to add in some other things to think about as well.

1. Self-Directed IRA (SDIRA): This is what @Dmitriy Fomichenko mentioned, and he's right, it could be a self-directed IRA or a solo 401k. You can roll your Traditional IRA into a Self-Directed IRA, which allows real estate investments. Just remember the property must be owned by the IRA, and you can't personally manage or use it—all income/expenses need to stay within the IRA.

2. First-Time Homebuyer Program:  This is what @Arthur Flores was mentioning. If you're buying your first home (or haven't owned one in the last two years), you can withdraw up to $10,000 from your IRA penalty-free for a down payment. While this doesn’t apply to investment properties, it’s useful for primary residence or house-hacking strategies.

3. 60-Day Rollover Rule: You can withdraw funds from your IRA and avoid penalties as long as you return the money within 60 days. It's a bit risky unless you're sure you can replace the funds, but it could work for short-term needs.

4. Roll into a 401(k) and Take a Loan: If you have access to a 401(k) plan (Or can start one for a business you run), you could roll your IRA into that plan and take a loan against it. You can typically borrow up to 50% of the balance, up to $50,000, and repay yourself over time. This allows you to use the funds without triggering penalties or taxes, as long as you stick to the repayment schedule.

These strategies all come with rules and limitations, so it’s a good idea to check with a tax advisor before moving forward.  Hope this helps, and let me know if I can answer any follow-up questions.

[Brad Kanouse]

Thank you Josh! Great information and alot for me to think about.

[Basit Siddiqi]

There is an amount that you can distribute from an IRA account to purchase a personal residence.

You then might be able to turn the personal residence into an investment property.

Best of luck.

[Michael Whitman]

Quote from @Josh St Laurent:

@Brad Kanouse

You've gotten some good info so far from Arthur and Dmitriy and I wanted to add in some other things to think about as well.

1. Self-Directed IRA (SDIRA): This is what @Dmitriy Fomichenko mentioned, and he's right, it could be a self-directed IRA or a solo 401k. You can roll your Traditional IRA into a Self-Directed IRA, which allows real estate investments. Just remember the property must be owned by the IRA, and you can't personally manage or use it—all income/expenses need to stay within the IRA.

2. First-Time Homebuyer Program:  This is what @Arthur Flores was mentioning. If you're buying your first home (or haven't owned one in the last two years), you can withdraw up to $10,000 from your IRA penalty-free for a down payment. While this doesn’t apply to investment properties, it’s useful for primary residence or house-hacking strategies.

3. 60-Day Rollover Rule: You can withdraw funds from your IRA and avoid penalties as long as you return the money within 60 days. It's a bit risky unless you're sure you can replace the funds, but it could work for short-term needs.

4. Roll into a 401(k) and Take a Loan: If you have access to a 401(k) plan (Or can start one for a business you run), you could roll your IRA into that plan and take a loan against it. You can typically borrow up to 50% of the balance, up to $50,000, and repay yourself over time. This allows you to use the funds without triggering penalties or taxes, as long as you stick to the repayment schedule.

These strategies all come with rules and limitations, so it’s a good idea to check with a tax advisor before moving forward.  Hope this helps, and let me know if I can answer any follow-up questions.

 Good advice! The only thing I would add to this is if you leave the company, check with benefits as the loan from your 401k may be due in full. @Josh St Laurent would you know for sure?

[Josh St Laurent]

@Michael Whitman , it would totally depend on the company, but you make a great point. If you're able to download the SPD (Summary Plan Description), there will be a section pertaining to loans where you could find out and know ahead of time.

[Marco Bario]

Quote from @Dmitriy Fomichenko:

@Brad Kanouse,

I believe this is a duplicate of this post:
https://www.biggerpockets.com/forums/311/topics/1210256-usin...

But regardless, here is my answer:

If you take a distribution from an IRA - it will be subject to taxes and penalties.

You can convert your IRA into a "Self-directed IRA" and have the IRA buy the property, in this case you are not the owner, the IRA is. You won't be able to use conventional financing and must use a non-recourse loan which typically require 40% down. Also be aware of Unrelated Business Income Tax (or UBIT) on leveraged real estate inside of an IRA.

Or better yet, since you are self-employed - go with a truly self-directed Solo 401k plan, which would be a much better option and will help you avoid the UBIT on this investment.

And the Solo-K would enable you to borrow $50K from the retirement balance to use as you please.

[Michael Ohara]

@Brad Kanouse I have an idea that doesn't involve drawing from your IRA. Sending a connection request.

[Jonathan Chan]

Solo 401K, pull personal loan out at 50K or half the balance of the account, whichever is less. The loan has a payback period of 5 years in equal installments. 

[Neil Smith]

@Dmitriy Fomichenko, follow-on question on this topic. Do you happen to know if existing traditional IRA funds from outside of a business that I own can be transferred inside of a Solo 401K plan?

Thanks for the intelligent info. and contributions on this topic. 

Neil

[Dmitriy Fomichenko]

@Neil Smith,

Yes, Traditional IRA can be rolled into Solo 401K.

[Bryan Stengel]

Hi Brad, I believe a 401k loan may be helpful in terms of putting toward a down payment if needed.  The interest that it does accrue is money you don't lose, but rather it does go back into your investments.  However, I wouldn't say it is a complete tax-free strategy.  The money that you end up owing to repay the loan over the 5 year term is now post income tax money unlike how you traditionally are supplying your 401k with pre-tax money.  In other words, you will be taxed twice on the money that you do take out essentially.  You will also provide the whole amount if you plan on repaying the loan in full beforehand.  Money you put in and then when we hit 59 years or older, money that you end up withdrawing.