All Forum Posts by: Steve Englehart

Is your IRA a traditional or roth IRA? If it's a roth IRA, you may be able to take out the principle tax/penalty free.

Hi this is Swanny.  That is exactly what I did and told my story on BP Podcast 238 in 2017. I cashed out one little condo (rental property) at a time and paid the the taxes to do so. Just made to take out the taxes at the same time to make sure I had them to pay those taxes.

Swanny (Michael Swan)BP Podcast 238 guest 2017.

All fair questions and yes, there are far too many variables to say with any sort of certainty. Here is how I look at it:

If you have $125K in a Roth 401K that will earn tax free earning at just under 10% per year, you will get a doubling every 4 years based on the rule of 72, making that $125K worth $2M in 30 years. That $2M would be worth $100K on a safe 5% withdrawal rate at that time. Very significant, and demostrates the power of compounding interest. 

Now, if you pull out that $125K and pay the tax penalties, that would get knocked down to ~$100K after fees and taxes (rough numbers for easy math sake). Given that some of that would be your contributions that were paid with after tax income, especially after other REI tax benefits offsetting the blow, the cash eaten by taxes/fees wouldn't be as bad as the back of the envelope math suggests. Either way, you would be left with roughly enough to put 10% down on a $400-600K property and still have cash leftover for closing costs, furnishings and minor touch up renovations.

At 4% appreciation, that home would be worth $1.35M and be paid off by the end of 30 years which yes, is significantly less than $2M. However, if you can profit $1K/month off of that property and cycle that cash flow back into something that makes the same return as your boring 401K, that will net you another $1.8M in 30 years, pushing you well over $3M. That's without figuring in tax benefits, increasing revenue per year with inflation, picking a market with more appreciation potential, making more than $1K/month profit (very doable) etc that could supercharge those numbers even more. 

That's how pulling money from a retirement fund can net you far more in the end if you do it right. 

Why? Why not use your IRA to just buy the property? You will never get the $ back in the fees etc. you are gonna pay with penalties, your returns need to be absurd. My recommendation is get a self directed IRA and have the real estate be owned by your IRA