TBT: Does it make sense to withdraw IRA funds early for a down payment on a rental property?

Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy.

So first off, let me just read a quick email, short paragraph that I got from someone and then I’ll dive right into a great question I got from another listener that I think applies to a lot of people. And it’s, even if it doesn’t apply to you right now, it’s something that’s good to know and understand. But first of all, I got a quick email paragraph from a lady named Theresa. She was just talking about real estate investing in general, and she said hi there. And she’s, you know, opened up with her niceties and she said, I came across your podcast and your real estate investment approach makes sense to myself and my husband. We previously subscribed to Grant Cardone’s membership and found his high stakes multifamily building investments aren’t really the approach we wanna take. I happen to know Grant, good guy, very smart, very sharp, very aggressive, and a very successful person.

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Throwback Thursday Episode (The episode originally took place in the year 2024)

This episode is part of our Throwback Series and may include references to older content such as web classes, events, promotions, or links that are no longer active or available. While the conversation and insights still hold value, please note that some information may be outdated.

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Nothing bad to say about Grant, it’s just his approach and investment style and <laugh> marketing methods and tactics are definitely a little different, a little over the top, but they work for him anyway, Theresa continues to, to say we are looking for an investment advisor. Is that something you do? Interestingly enough, maybe I don’t talk about this enough or I really don’t talk about it all that much, but yes, that is something we do. In fact, just for the sake of clarification, our core business is Norada Real Estate investments. Norada Real Estate Investments is a real estate brokerage focused on real estate investors. Our only client are people like yourself looking to invest in real estate, expand your portfolio, or just getting started. And it really doesn’t matter if you’re a newbie or you’re slightly seasoned or you’re a very successful multi-unit owner real estate investor.

We work with anybody and everybody, not just in in the United States, but all over the world from Canada to Australia. So what we do is we just help you with our investment counselors, determine what the best markets and strategy is going forward. So we start with a strategy and a plan. And usually that’s buy and hold property for cash flow and appreciation over time. And we have inventory in different markets. There’s about 20, 25 different markets that we operate in, not necessarily all at the same time, but we have a pipeline of inventory that comes and goes in all of those markets and we’ll let you know what we have available. But our goal in working with an investment counselor here is to help you get clear on what you want to accomplish, answer all your questions, make sure you’re on the right path, and that you have the right team in place.

And we can provide you all those resources. Anybody and everybody that you will need to work with in this journey of investing from start to finish is something we will help you with. We’ll provide to you, we’ll help you identify the markets and then identify the right neighborhoods to be investing in that meets your investment criteria. And I’ve had many podcast episodes talking about this. And then we will share all kinds of turnkey inventory ready to go for you. And then that’s either new construction or it’s newly refurbished existing inventory in great neighborhoods. They’re typically B plus, A minus, sometimes A grade neighborhoods. That’s what we’d like to focus on, but it spans the gamut depending on what you need and want. So there is tons and tons of value that our company here at Norada Real Estate provides you. And all this comes at no cost.

So you have everything to gain, essentially nothing to lose except a little bit of time. And the worst case scenario is you’ll walk away with some education. So all you have to do is contact one of our investment counselors and you do that just by going to our website at noradarealestate.com, N-O-R-A-D-A, noradarealestate.com, fill out the form and our operations manager will probably reach out to you. But one of our investment counselors will connect with you and just set up a time to either have a conversation or just have a conversation by email. And there’s no cost, there’s no obligation, there’s no stress, there’s no pressure. You either understand what we do and you love it and you want it and need it or you don’t understand what we do. And when you learn about all the, all the benefits and the value that’s there from the education to the markets to the actual turnkey investment properties, you’ll wonder why you didn’t start working with us sooner.

In fact, it was funny, I actually, one of my friends and now and business partners said to me one day years ago, he said, geez, I told him what I just mentioned to you. And he said, geez, where were you five years ago when I needed you? And I <laugh> I guess I took that as being a compliment, but at the same time, my fault for not him knowing about us because of a lack of advertising or marketing. So anyway, be it what it be, what it is. Long story short, yeah, this is what we do. We help people like you invest in turnkey real estate in different markets around the country. That makes sense. And we provide you all the, the tools, the resources, and the education. It’s, it’s a, it’s a one-stop shop, completely turnkey from soup to nuts, so A through Z. And if you’re interested, just go to noradarealestate.com.

That’s it. Alright, I’ll get off my soapbox here. But thank you Theresa for the kind words and the courage to submit your question if this is something that we do. Yes. So talk to one of our investment counselors.

Alright, now off to the question of the day. The basic question comes in from Mike and his question is, this is essentially, does it make sense to withdraw IRA funds early for a down payment on a rental property? This is a great question ’cause there’s a lot of people who have self-directed retirement accounts, IRAs that have funds captured or trapped within them that could be used for a down payment. The question is, is is it worth taking an early withdrawal and paying the penalty on that for the sake of building a real estate portfolio? And I will tell you that it does make sense in certain situations.

So Mike’s email was very short. He said, hi Marco, I just finished listening to your podcast. Thanks for helping me keep motivated in real estate investing. Well, you’re welcome, Mike. My question is, should I pull out early on a couple of IRAs I have for a down payment on a new rental purchase? How exactly do I determine if it makes sense for me to do so or not? Thanks Mike. Well, Mike, great question and I’m sure many people have the same question. In fact, we’ve been asked this before. So here’s the thing. What what you need to understand is withdrawing from your IRA funds early for a down payment on a rental property can be very tempting. It’s attempting option for many people and it’s not right or wrong, good or bad, but it requires careful consideration because there are potential financial consequences. And here are the key factors to weigh in.

There’s some pros and there’s some cons. It’s about two or three of each. So the pro in doing this is the potential for rental income. You may not be getting rental income or distributions or, or cash flows of, of any kind in your IRA right now and maybe you are, but maybe it’s not enough. But buying a rental property can generate passive income and it can help diversify your investment portfolio. So this is why so many people are invested in real estate and want and like real estate. The other benefit, if you will, is the potential for real estate appreciation. And we’ve seen a lot of that in in recent years and re years past. And you know, that’s a great way to generate wealth and generate wealth, substantial wealth and faster than the rate of inflation property values can and often do over time appreciate.

So that provides long-term capital gains. It’s essentially additional wealth on your personal balance sheet. And of course there’s diversification if you don’t already have it. But real estate investments can diversify your holdings beyond traditional stocks and bonds, which is what most people end up holding in an IRA, you know, they’re kind of handcuffed one hand or sometimes both hands to be investing in stocks, bonds, and mutual funds. Now the cons in doing this is essentially the penalties early withdrawal. If you withdraw from a traditional IRA before your age of 59 and a half, you may face a 10% penalty on the amount you withdraw. In addition to that, you’ll still owe income taxes on the amount withdrawn and that’s gonna be based on your tax bracket. Now there are exceptions to this and I’ll get to that in a minute, but one right off the bat is if you have a Roth IRA, this doesn’t apply ’cause a Roth is an IRA where the money going in is already after tax.

So when you pull it out because it’s already been taxed, you’re not paying tax on the amount. The same principle you withdraw. Early withdrawal contributions are tax and penalty free, but withdrawing earnings from the Roth IRA may incur taxes and penalties unless you know you have an exception that applies. So, you know, talk to your financial advisor, your tax professional. Another con, if you will, is the loss of tax deferred growth. So the funds you withdraw from an IRA stop growing tax deferred, which could again, could maybe hurt your long-term retirement savings. It really just depends on what your investment strategy is, like the plan that you have in place and the returns that you are getting and expect to receive or ultimately will realize in the future. And then potentially the other con is an opportunity cost. While real estate might offer growth, withdrawing from a, you know, a an IRA that is actually performing well, that is properly invested and you have investments that are performing very well for you, it could mean giving up potentially, potentially higher return.

The thing is, you don’t know that you don’t have a crystal ball. So it’s hard to predict that, especially with very liquid assets like stocks and bonds and mutual funds, that can change very quickly. You know, from day to day, week to week and month to month. Real estate is a little bit more stable, predictable, you know, it has its benefits, it’s a slower moving asset class, but you can pretty much predict with a degree of accuracy what your real estate portfolio will do over time. And you know, keep in mind, you know, everything comes with an element of risk. Everything, you know, real estate can be lucrative and often is, but it’s not without its own set of risk factors, if you will. You know, you will have property maintenance, the occasional vacancies which you factor for, you know, it’s, it’s a fact of life.

You’re gonna budget for that. And of course, you know, you have market fluctuations or even market downturns and that can impact cash flows and returns. We haven’t seen this recently and it doesn’t happen all that often, but it is a factor to consider. Now, Mike, you know, something you might want to consider as an alternative is an IRA based loan. You know, you can borrow from other sources like a home equity line of credit, a HELOC is an option that might be a different option or, or an alternative to withdrawing from your IRA. IRA. I’m not trying to say that it’s not worth it or you shouldn’t consider it. It’s an option and you should consider it. You just have to run the numbers and pencil it out. And this way you kind of quote unquote preserve your retirement savings, especially if they’re performing well.

But if they’re not performing well or not performing at all, then withdrawing might make a whole heck of a lot of sense. Again, you have to just pencil the numbers. What do you, what do you have to pay for taxes? And then there may be potentially a 10% penalty. But ultimately if you have a solid investment plan for the property or properties that you plan to purchase and you can accept the trade-offs, it might make sense to do so. Again, you just have to compare the situations. Now, just a quick comment about the penalty for withdrawing money from your IRA early. It’s a 10% additional tax, if you will, on the amount you withdraw. So you’re gonna have the income tax and then you know, this, this 10% fee or additional tax on top of it. Now the penalty applies to most withdrawals made before the account holder, such as you turns 59 and a half.

That changes after 59 and a half, but you know, you just have to be aware that there is this 10% additional tax and you report that on a form called form 53 29 or schedule two of your form 10 40, your personal tax return. There are exceptions to this if you’re using the money, the withdrawal to purchase your home like a principal residence, there are, are some exceptions, a certain amount, I think it’s $10,000 is without penalty. Medical expenses qualify. So that helps reduce, you know, penalty and then permanent disability also qualifies. But if you’re a traditional IRA holder, a SEP IRA, a, simple IRA, anything like that, you’ll owe taxes at the current tax rate on the amount you withdraw. So for example, if you’re in the 22% tax bracket, you withdraw amount, you’ll be taxed on your 22% marginal tax rate on the amount you withdraw.

So how long will it take to make back the taxes and fees? That’s really the question I think you need to figure out. You can run scenarios, make some assumptions, assumptions on cash flow, assumptions on the appreciation of the investment property you’re buying or properties. And with that, when you look at the expected cash flows and the expected appreciation and those are gonna be your realized and unrealized returns from the real estate investment, then you can see how long it’s gonna take, how many months or years it’s gonna take to, well it’s gonna be years, not months, but to how long it will take to recoup the, the the taxes you’re gonna pay on the withdrawal plus the potential penalty that 10%. So if that’s in one to three years from now, it might make sense because then anything and everything after that is potentially going to be an opportunity for you in making more from your real estate portfolio than what you might have been making in your self-directed IRA or retirement account of whatever kind it is.

So I hope that makes sense. You know, it’s just a matter of running the scenarios, not withdrawing and withdrawing. What do you stand to gain over the next 1, 3, 5 years in your IRA or your self-directed account? And compare that to having one or more rental properties and what you stand to gain with those properties in whatever market that might be in. And that kind of segues to where I started this show, this episode in speaking to an investment counselor here at Norada Real Estate because we can walk you through and talk you through these different scenarios. Again, no one has a crystal ball and no one knows definitively and for sure where the market’s going to end up in a year or three years or five years from now. We can make predictions, we can see trends, we can give you a pretty good idea of what is gonna happen market by market and how real estate will and should perform for you.

So, so anyway, take advantage of that. That’s what we’re here for, Mike. Great, great question. Thank you. I know a lot of people are kind of asking that same question. Does it make sense to withdraw IRA funds early for a down payment on a rental property? Well, there you have it. That might be what you needed to hear.

I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. . I read all of them, I reply to many of them, and sometimes I cover them on the show, and I’m gonna try and do more of that. So, I am going to encourage you to go to passiverealestateinvesting.com and submit your question for Ask Marco.  Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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