Tap my IRA for RE Investment?

Question

Should I pull out a portion of my IRA balance to purchase RE? I have $200K, but can withdraw about 45K without penalty (what I'm told by my advisor). He advises against it. However, I think I can grow this substantially more through RE than I can by leaving it in the IRA. Also, I'm interested in withdrawing more than the non penalized amount and taking the hit for early withdrawal, as again, I feel that I myself can produce better returns on the money. I appreciate any feedback. Thank you.

Daniel Dietz · Answer

@Nick C.

There are obviously a LOT of things to think about here; taxes/penalties, the option of investing INSIDE your IRA, how much higher of a return you need to get OUTSIDE your IRA to make up the cost of taxing out the non tax free part etc...

I DO invest in both my SDIRA (ROTH - because you cant roll ROTHs into SOLO401K) and SOLO401K (Traditional) along with two partners who also us both SDIRA and SOLO401K. We dont use leverage in the SDIRA, although it is not hard to do and the resulting taxes are minimal if doing buy-n-hold investing. The reason we used the SOLOs is because they are exempt from taxes due to leveraging. We were able to find loans at 60-70% LTV in the 5-6% range.

With that said, I think you need to just run the numbers and compare 1) If I keep these funds IN my SDIRA and use 60% leverage I can earn what percent? (ours is about 12-16%) vs 2) If I take the funds OUT and pay any penalties and taxes and invest 'traditionally' with say 80% leverage I can get what percent? (In our case 15-20%). Then simply run then numbers to see how long it would take to 'catch up' with the lower principal amount but a higher return.

With THAT being said I am considering take a little bit of the penalty free contributions out of my ROTH to use as a down payment on a duplex since I can leverage it at 5 to 1 outside the IRA and only 2.5 to 1 inside the IRA. I would lose the 'tax free' advantage of the ROTH, but I see buy-n-hold as somewhat 'tax free' or at least 'tax deferred' when done right when considering depreciation, tax free cash out refinances, and 1031s down the road.

Good Luck, Dan Dietz

Carl Fischer · Answer

@Nick C.

I’m not sure if it’s the traditional or Roth IRA that you were talking about taking money out penalty free. Either way think about self directing the account into real estate before taking money out.

If you don’t need the money to live on and you know you can do better in real estate than in the traditional stocks, bonds and mutual funds, make your IRA self directed and get to work. You can use the whole $200k. No taxes or penalties.

I have been doing it for 20 years and love it. Our clients do it all the time and love it. Lots of ideas on this BP forum. I was just on the National Real Estate Cruise with Real Estate investors from Memphis and Nashville. If you want to contact them let me know and I can send contact info.

George Blower · Answer

@Nick C.

It appears that you already understand that federal and state taxes will apply on the amount distributed from the Traditional IRA.

Another option is to transfer the IRA to a self-directed IRA and invest the IRA directly in real estate. This would result in the IRA owning the property so all the rental income would flow back to the IRA. This is another way to grow your IRA.

Real estate is an allowable investment in an IRA, provided the IRA custodian allows for it. A company that allows for it is IRA Services Trust Company.

https://www.irs.gov/retirement-plans/retirement-pl...

Nick C. · Answer

thank you for your responses to my question. Utilizing a self directed IRA to purchase investment property is not very compelling to me due to the lack of autonomy that would exist as a result of utilizing this method. I'm leaning toward withdrawing the money for a flip project, as I feel that I can recoup and then grow the withdrawn money faster than it will grow within my IRA. Im doing this to jumpstart my RE investing career. If I'm essentially pulling out 25% of my retirement fund to put into RE investing, I don't feel like that is too detrimental to my overall portfolio if something were to go awry. If I'm being foolish about this please bring me back to reality guys. Again, thank you very much for your attention and input.

Henri Meli · Answer

@Nick C. . When you say "Do better", you actually need to sit down and run numbers. If you take out the money, you need to pay 10% early withdrawing penalty and on top of that, it is considered income. So, you add it to your current income then you apply your tax bracket to it. If you live in a state with state income tax, then you need to add more. This could take you into territories, where you find yourself paying 30 or 40 %. So, if you pull 100k, you might end up having really only $60k available. How long would you need to catch up to that 100k?

On the other hand, SDIRAs have lots of rules and have lots of limitations. Although you have the option of investing in real estate, there is a good number on constraints in these accounts. Make sure to educate yourself well, before you go down that route.

Good luck

Tap my IRA for RE Investment?

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