Self Directed IRA for Early Retirement?

Question

Hello BP community,

Are self directed IRAs a good idea for those working towards early retirement? My goal is to retire/be financially free by age 35 and not being able to access the cash without penalty until 59 1/2 makes this option seem like it wouldn't be feasible since I won't be able to access the funds for many years into retirement. However, I have funds in a Roth IRA that I would like to utilize now.

I am looking for advice and suggestions from seasoned investors or those who have a thorough understanding of IRAs and creative financing.

Thanks!

Trevor Ewen · Answer

@Jessica Dix

One thing that hangs up a lot of people about IRAs is this feeling: "I can't access the money till X, and I have plans to be financially free on Y, so why do it?" And it's a good question, it feels limiting when you could be spending your time and money in other places.

The way I get over this (and advise others to think about it). That 59 1/2+ version of you is a different person. You are the investment manager for that person. Also, that person has slightly lower risk tolerance than you.

My taxable funds are one goal that we are currently working toward for the benefit of our family. This money can flow in and out of investments, into business ventures, into the stock market, maybe even into education or home (primary residence) purchases if they make sense at a certain juncture.

Never do the two mix. My retirement funds may end up being invested with some of the same partners, but they operate on different criteria. They operate for the needs of the other person who is my future self. With this approach, your future self is now much more insulated from the appropriate risk appetite of your present. You can 'lose your shirt' and still retire comfortably... that's the name of the game with IRA and retirement funds for me.

Brian Eastman · Answer

@Jessica Dix

I strongly suggest you sit down with a fee only financial advisor familiar with real estate before pursuing such a path.  I'm not advising for or against any particular strategy, but when you see the numbers in front of you, it will make sense.

Jessica Dix · Answer

@Dmitriy Fomichenko That was my thinking as well. I like the idea of the self directed IRA, however, utilizing the funds from my Roth to fund my first investment property seems like a more appropriate path for early retirement.  What are your thoughts on withdrawing and paying the penalty? The self directed IRA might be something I should consider after I achieve financial independence?

Andrew Morris · Answer

@Jessica Dix  By reading your profile... you are 28 and your family has been in RE for a while. You are looking to get into it and want to achieve your goals early on. You are young, what are the risks of taking your money and using it to START REI? The risks are low.! There are a lot of good thoughts/opinions/replys on your post about IRA's and 401(k)s. Don't let the IRA / 401(k) issue hold you up and prevent you from starting REI and reaching your dreams. Go ahead and achieve your goals if you have the means. Take that money and get your first property! You sound like a smart woman and have a good family that understands REI. If you want to start an IRA or solo 401(k) after your first or second RE purchase... by all means do that. Just don't let the idea of an IRA / saving for retirement hold you back from retiring/reaching financial freedom! You have many many years to put money into an IRA or 401(k). Did Kim Kiyosaki have an IRA for her savings? a 401(k)? By all means do your research as there may be a better way of holding your "down payment funds" in some kind of account smarter than a savings account. But don't be afraid to take that money and reach for your goals. I'm sure your parents can offer some great insight.

Vincent V. · Answer

Check out The Self Directed IRA Handbook written by Matt Sorensen. It's informative and it's available on Amazon

Dmitriy Fomichenko · Answer

Jessica, I understand your ambition to reach early retirement but I can't comment much without knowing your defenition of "early retirement", the time frame you have to achieve that, your risk tolerance, and investment experience. All of those factors could come into play when making the determination to take early distribution from your retirement account...

Jessica Dix · Answer

@Brian Eastman Thank you Brian. This is perspective I had not really considered yet. I suppose I was thinking along the lines of focusing on securing my early retirement first, but not necessarily at the expense of the latter years.  To use your example, I would take the $100 I have now, use it to purchase my first investment property, grown my RE portfolio well beyond the initial investment, and use a self directed IRA after I have made some money. I am in the beginning stages of saving up cash for my first deal and my IRA funds would get me started much sooner.

Jessica Dix · Answer

@George Blower thank you for the information. I will do some more research on the Roth IRA rules.

Jessica Dix · Answer

@Si Chen Isn't the point if the self-directed IRA that it is "self" directed and you have control over your funds? Help me understand by expounding on what you mean by "custodian". I haven't read anything saying I wouldn't have any control over my funds. Thank you!

Brian Eastman · Answer

@Jessica Dix

A Roth IRA when properly used, and when started young can create a HUGE amount of tax free income for your retirement years.  To pirate those funds now would generally be considered a short-sighted move.   I would recommend a self-directed IRA and putting that money to work in something you know and understand such as ownership of real estate, notes, etc.  Continuing to contribute while you are young is also something I would highly recommend.

To the point made by @Si Chen above, the alternative of a checkbook IRA LLC eliminates the need to have the custodian process each and every transaction.  You are entirely in charge of your investments.

Would you rather have $100 in your pocket today or $5000 of tax free money when you are 60.  It is that kind of math, or even more so.

Self Directed IRA for Early Retirement?

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