Is it smart to draw early from Roth IRA to invest in real estate?

Question

I currently have about $115k in my Roth IRA. $60,000 is contributions. If I understand this correctly, I think I could pull out $60,000 for a 10% penalty ($6000). If I pull out the whole thing I think I would get hit with 10% + 22% on the gains.  So, would it make sense to pull out $60,000 to buy a second property if that means I could rent out my current property for $500 to $1000 / month positive cash flow?  Seems like my return on that would be better than the “loss” of leaving it in until I’m 59.5. Btw I’m currently 38 years old.

Account Closed · Answer

Make sure whatever you're using the $60k for is worth it.  Consider what $60k compounding for 20+ years can do that requires zero work on your part.

Scott Jensen · Answer

@Eric Lau That's not exactly true.  You can take contributions out of a Roth IRA without penalty. This is not true of a Roth or traditional 401(k) or Traditional IRA.  With the Roth, you don't have to ever put the money back in.

As far as putting money back in, your accountant may have been referring to a "60 day IRA Loan", which has to due with taking any amount of a Roth, Traditional IRA, or 401(k) as long as it is put back into the account within 60 days.  These are REALLY easy to screw up though, there's a 1 time per year rule and I don't think that 60 days is at all flexible.

Matt Millard · Answer

@David Bittorf

I pulled out a small Roth of over $15k in college tax free to house hack & never looked back. Returns & quality of property made it an easy decision. Better on primary residence though....

Scott Jensen · Answer

@David Bittorf It completely depends on whether the deal is worth it. I aggressively put money in my Roth because I know its not locked up until retirement. I can and do use these funds for real estate deals if I need to.

Using the basis in your Roth is a perfectly legitimate source of funding. You can take out the amount you put in at any time without taxes or penalties. You can take out any amount that was converted from an IRA or pre-tax 401(k) after 5 years.  You can take out earnings after the account has been established for 5 years and you are 59 1/2.

There's other ways to get at Roth money before 59 1/2 as well in certain circumstances.

Scott Jensen · Answer

@Steven Eitreim

Regarding the non-qualified distribution of earnings from a Roth IRA (or Roth 401(k))…that would be logical thing to think.  However, the IRS has something better than logic, they’ve got the tax code! Which isn’t logical in this case.  The earnings from the Roth account will be subject to both income taxes and penalties. So, if you’re in MN and making good income that can put you around 50%.

Per the IRS website:

Nonqualified distributions

• A distribution that is not a qualified distribution will be partially included in gross income if there are earnings in the account.
• The distribution will be treated as coming pro-rata from earnings and contributions (basis).
• The 10% tax on early withdrawals may apply to the part of the distribution that is includible in gross income.

https://www.irs.gov/retirement-plans/designated-roth-accounts-distributions

Other than that I agree completely. We are in a historically low income tax situation so deferring taxes doesn't make sense for more most people.

I wouldn't necessarily think socialist government would be favorable to real estate taxes. It's hard to predict what ludicrous things congress will do.

Here's to the next trillion. $$$ :-)

Scott Jensen · Answer

@Steven Eitreim why wouldn't you just do a self directed IRA or individual 401(k) to invest in real estate with instead of taking the penalty?

If you are that confident in the market having a major correction in the next 1 to 2 years you could short the S&P 500 (SPY ETF of something).

Ashish Acharya · Answer

Ignoring the analysis of if you should pull out the money out of retirement, the withdrawal of the contribution is both tax and penalty free.

That’s is unique to the Roth IRA. If it was Roth “ other retirement plan”, each withdrawal would consists of earnings as well.

In the Roth IRA, contribution comes out first, so you can withdrawn up to your basis(contribution) tax and penalty free.

Is it smart to draw early from Roth IRA to invest in real estate?

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