Author Topic: Cashing out IRA to buy investment property - is this a bad idea?  (Read 5587 times)

Irisgirlwinnie

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Hi all, thanks for taking a look.
Me: Married, 46 with a 4 year old. Working in the family business (husband's contracting firm) while I homeschool my son and renovate our fixer-upper.
I quit my FT job in the fall of 2014 and my income now is half what it was then.
I have $35k in an IRA that I'm no longer contributing to. I will most likely never work at another organization/company that provides IRA/401K benefits.
I'm more and more convinced that the market is going to shit the bed again and would rather not lose the gains the IRA has made - especially in the last year.
What are your thoughts on my cashing in the IRA, taking the 10% penalty, and buying an investment property? It's not a huge chunk of money and I feel like I could use it more effectively with a rental property.
Our only debt is the mortgage on this fixer-upper at 3.2 % fixed.
Am I off base?
Also, if I cash out and have ~$30k to invest, will that be taxed as income? Is there any way to avoid that?
Many thanks for your input!
« Last Edit: January 13, 2016, 06:28:22 PM by Irisgirlwinnie »

igm

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #1 on: January 13, 2016, 06:49:31 PM »
Markets and properties both go up and down. Investment property could be riskier than a retirement account in a diversified index fund: http://www.mrmoneymustache.com/2012/02/01/mr-money-mustaches-big-mistake/

Could you keep the funds in the retirement account, and obtain new funds for an investment/rental property?

lostamonkey

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #2 on: January 13, 2016, 08:07:45 PM »
I am not American so I am not familiar with all the US tax rules but I believe you can buy a rental property within an IRA.

That being said you are breaking the cardinal rule of investing. DO NOT TIME THE MARKET.

seattlecyclone

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #3 on: January 13, 2016, 08:14:33 PM »
I have $35k in an IRA that I'm no longer contributing to. I will most likely never work at another organization/company that provides IRA/401K benefits.

Your employer doesn't need to take any action for you to contribute to an IRA. As long as you earn money from a job, you can contribute to an IRA. You can even contribute if you don't personally work but your spouse does.

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I'm more and more convinced that the market is going to shit the bed again and would rather not lose the gains the IRA has made - especially in the last year.
What are your thoughts on my cashing in the IRA, taking the 10% penalty, and buying an investment property? It's not a huge chunk of money and I feel like I could use it more effectively with a rental property.

I think you're trading one type of risk for another. Housing prices and rents can be volatile just like stocks. Which one will prove to be the better investment from today forward? Nobody knows. The only certain thing is that by paying the 10% penalty to switch investments you'll need to do 10% better than the stock market with the rental property just to break even. How do you like those odds?

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Also, if I cash out and have ~$30k to invest, will that be taxed as income? Is there any way to avoid that?

Is this a traditional IRA? If so, you'll owe tax at your current marginal rate plus 10% if you withdraw the money. There's no way to avoid paying the tax on this money when you take it out; the best you can hope for is to withdraw when your tax rate is as low as possible. For most of us this will be after we retire, not before. To avoid paying the 10% penalty, you can do a "Roth pipeline" (look for more information elsewhere on this forum), but you'll still pay the regular tax on this money and you'll have to wait five years before withdrawing.

ooeei

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #4 on: January 14, 2016, 07:01:23 AM »
If you think the market is going to drop soon, why not turn it all into cash and wait for the market to drop so you can buy back in?  Because you can't predict the market, that's why!

Keep in mind there's also taxes to consider.  Assuming you're in the 25% bracket you're looking at 25% taxes along with the 10% fee.  You'll end up with ~$24,000 that you can invest in a house.  Add in the transaction costs of buying a house (realtor fees, inspection, etc etc) and you're going to burn through almost your entire $35,000 just for the privelege of owing money on a house.

thedayisbrave

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #5 on: January 14, 2016, 07:13:10 AM »
Is it a bad idea? Yes. 

ShoulderThingThatGoesUp

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #6 on: January 14, 2016, 07:21:31 AM »
Yes. It's downright idiotic.

Giro

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #7 on: January 14, 2016, 07:28:37 AM »
You are my father.

The market is down and he wants to liquidate and "not lose any more money".  When the market is down, why would you sell?  You're supposed to be buying!!

Stop watching the market.  Stop checking your IRA balance. 


dandarc

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #8 on: January 14, 2016, 07:31:42 AM »
What we have here is a lack of knowledge and perspective.  Suggested reading to correct these deficiencies with regards to the stock market:

http://jlcollinsnh.com/stock-series/

MsPeacock

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #9 on: January 14, 2016, 08:58:09 AM »
Yes - bad idea. Also, you can still contribute even if you aren't working but your spouse works. You get the tax benefits of the contribution (lets say saving 26% of the money by not paying taxes on it, depending on your income of course), which would be even greater return on your investment vs. buying another property.

If you want a more conservative investment you can look at moving the money to a target retirement type of fund that becomes more conservative as you get closer to retirement.


lakemom

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #10 on: January 14, 2016, 11:11:18 AM »
Save the penalties and convert the IRA holding from whatever it is in now to holding exclusively REIT's.  Now you have the risks of real estate without the hassles of managing it or the penalties of early withdrawl.  As long as you have earned income you can continue to invest in an IRA (you said that your income is half what it used to be.)  Honestly cashing it out would only make sense in a hair on fire debt emergency where your primary residence was at risk.  For now let it ride and try not to panic over the market.  Having weathered the losses in the late 80's and in 2008, the market will come back there will be no permanent downturn.  Anyone who left their money alone during those crises made it all back and then some.  Those who pulled it out had permanent losses.

igm

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #11 on: January 14, 2016, 01:15:44 PM »
Irisgirlwinnie

Would you want a rental property even if the market was expected to go up?

Are you wanting a fixer up to play with and get rental income from?

zephyr911

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #12 on: January 14, 2016, 01:45:29 PM »
Add in the transaction costs of buying a house (realtor fees, inspection, etc etc) and you're going to burn through almost your entire $35,000 just for the privelege of owing money on a house.
That's a bit hyperbolic. Commissions are almost always 100% seller-paid. I'm a Realtor myself and have yet to do one deal where the buyer paid anything in commission, and inspections only run a few hundred.
My partnership bought its first two properties for a total of $30K in down payments + closing costs, and is earning double-digit returns on both investments.

BACK ON TOPIC:
All that said, OP, I would NEVER cash an IRA to invest in real estate. If you're concerned about the market being overheated, rework your asset allocation, but leave everything inside the tax shelter. Someday this nest egg will be worth six figures and you'll be glad you ignored the hysteria. PLEASE DON'T DO THIS.

onlykelsey

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #13 on: January 14, 2016, 01:56:03 PM »
Change what your IRA is invested in if it doesn't line up with the risk exposure you'd like, maybe even REITs, but do not take your tiny retirement stache and put it in to a house. no. no no no.

Irisgirlwinnie

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #14 on: January 14, 2016, 02:34:25 PM »
I'm so grateful to those of you who took the time to provide such friendly and helpful feedback. I came here knowing that there were folks here who had a clearer view on what's the smart thing to do. Thank you.
I'll keep the IRA and may even contribute to it here and there.
Cheers!

Irisgirlwinnie

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #15 on: January 14, 2016, 02:37:06 PM »
Irisgirlwinnie

Would you want a rental property even if the market was expected to go up?

Are you wanting a fixer up to play with and get rental income from?
There is an aspect of play with this, yes. I entertained the idea of buying a lake/ski house and Airbnb-ing it, but the delayed winter in New England has shown me that there may be too many unrented weekends for it to make sense. I'm not willing to overextend us for the play, though.

igm

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Re: Cashing out IRA to buy investment property - is this a bad idea?
« Reply #16 on: January 23, 2016, 09:01:01 AM »
Sounds like you know the realty market and are making a good decision by not overextending yourselves. Good luck.