Author Topic: Using Roth money for real estate  (Read 2840 times)

Brokefuturedoctor

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Using Roth money for real estate
« on: March 04, 2017, 07:29:39 AM »
Is it possible to use Vanguard Roth IRA money in order to buy real estate and get tax free gains besides REITs?

steevven1

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Re: Using Roth money for real estate
« Reply #1 on: March 04, 2017, 08:18:34 AM »
Probably not with Vanguard, but yes, you can do this with a self-directed IRA company. Google it. Fees are usually higher than places like Vanguard.

Brokefuturedoctor

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Re: Using Roth money for real estate
« Reply #2 on: March 04, 2017, 11:58:13 AM »
Cool, thanks Steven

waltworks

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Re: Using Roth money for real estate
« Reply #3 on: March 04, 2017, 01:13:23 PM »
The rules for doing it are very strict and to a significant extent prevent you from controlling the real estate (you can't manage it yourself, you can't fix things yourself when they break, etc) so do your research very thoroughly before jumping in. Unless you are in some very weird situation I have a hard time imagining it is worth the effort - just buy RE with taxable money, or alternately buy REITs in your 401k or whatever.

-W

FIreDrill

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Re: Using Roth money for real estate
« Reply #4 on: March 04, 2017, 03:27:18 PM »
I've looked into the self directed ira rules regarding real estate investing and I believe it only makes sense if you are looking at flipping homes for a quick profit and contracting all the work out.  If your looking at building a rental portfolio you can't really use leverage (mortgages) within a self directed ira without getting some big tax hits.  In my opinion, that kinda defeats the point of building a rental portfolio with leverage.

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Cwadda

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Re: Using Roth money for real estate
« Reply #5 on: March 04, 2017, 03:46:32 PM »
Another thing worth mentioning is that you can use $10,000 from your Roth, one time only, to purchase a primary residence. No taxes and withdrawal fees. But the account has to be 5 years old.

Brokefuturedoctor

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Re: Using Roth money for real estate
« Reply #6 on: March 04, 2017, 04:26:19 PM »
I thought using Roth money for RE sounded a bit too good to be true. It seems like it would remove a significant tax burden especially in terms of flipping. That's not what I want to do anyway though. I would much rather buy and hold

FIreDrill

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Re: Using Roth money for real estate
« Reply #7 on: March 04, 2017, 05:39:31 PM »
I thought using Roth money for RE sounded a bit too good to be true. It seems like it would remove a significant tax burden especially in terms of flipping. That's not what I want to do anyway though. I would much rather buy and hold
Remember, you can always withdraw your contribution amount at any time without penalty or tax in a Roth IRA.  If I was going build a rental portfolio and all of my assets were tied up in Roth accounts, I would definitely consider this.

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2microsNH

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Re: Using Roth money for real estate
« Reply #8 on: April 05, 2017, 01:43:22 PM »
I'm doing this right now: using my Roth IRA investments for a down payment on a house. So, I've been looking into details and here are the relevant ones for RE investing:
1. You can withdraw any and all contributions tax- and penalty-free, you just have to report it on your next tax return (Form 1099R);
2. You can withdraw up to $10K in earnings tax- and penalty-free, as long as you're using the money as a "first-time home buyer", which just means you haven't paid interest on a mortgage loan for the past 24 months (i.e., you can have owned a home in the past, just not have paid interest on a mortgage loan within the past 24 months);
3. The Roth IRA "ordering rules for distributions" specify that you must first take out your contributions, then any rollovers, and then earnings (i.e., you can't take out earnings first and then contributions);
4. To withdraw earnings, you must have been paying into the Roth IRA for at least five years.

waltworks

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Re: Using Roth money for real estate
« Reply #9 on: April 05, 2017, 01:45:03 PM »
OP was, I think, asking about RE investing (hence the comparison to REITs), not about buying a personal home.

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2microsNH

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Re: Using Roth money for real estate
« Reply #10 on: April 05, 2017, 07:33:29 PM »
Oh yes, now I see the distinction the OP was making.

Coach Carson

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Re: Using Roth money for real estate
« Reply #11 on: April 12, 2017, 11:03:24 PM »
I've used my ROTH IRA as a self-directed account to invest in real estate for over 12 years. I agree with another poster that it's not always worth the effort for everyone. But it's worked out pretty well for me.

I have typically focused on:
1. Private notes/mortgages (loans against real estate)
2. Tax liens - most of the time you get interest, sometimes you get properties (VERY cheap)
3. Limited shares in an LLC that owns rental properties

Notes and tax liens are my favorite. I have not flipped houses, but I know people who have. I'd personally prefer for liability reasons to loan money to someone flipping the house and then take a share of the profit.

There are a lot of gotchyas to avoid with seld-directed IRA investing. Someone already mentioned it, but you can't do work yourself, it's not wise to manage it yourself, and you can't get any personal benefit from the investments. If you do one of these disqualified transactions, the penalties are ENORMOUS.

So, this strategy is for those who think they can find some opportunities personally and put their money to work. If you don't want to be that active, just stick to index funds. I do that too with other IRA/401k funds.

NoNonsenseLandlord

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Re: Using Roth money for real estate
« Reply #12 on: April 14, 2017, 06:26:56 AM »
The rules for doing it are very strict and to a significant extent prevent you from controlling the real estate (you can't manage it yourself, you can't fix things yourself when they break, etc) so do your research very thoroughly before jumping in. Unless you are in some very weird situation I have a hard time imagining it is worth the effort - just buy RE with taxable money, or alternately buy REITs in your 401k or whatever.

-W

I used to think that too, but you can manage the property yourself.  You just cannot do any work on it.  You can manage stocks in an IRA, you can manage the rental. 

Managing would entail anything a 'regular' property manager would do.

hoping2retire35

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Re: Using Roth money for real estate
« Reply #13 on: April 14, 2017, 08:39:49 AM »
The rules for doing it are very strict and to a significant extent prevent you from controlling the real estate (you can't manage it yourself, you can't fix things yourself when they break, etc) so do your research very thoroughly before jumping in. Unless you are in some very weird situation I have a hard time imagining it is worth the effort - just buy RE with taxable money, or alternately buy REITs in your 401k or whatever.

-W

I used to think that too, but you can manage the property yourself.  You just cannot do any work on it.  You can manage stocks in an IRA, you can manage the rental. 

Managing would entail anything a 'regular' property manager would do.
yep, tenant finding and signing leases, calling handy man etc. "Cant' work on it your self though. Doubt the IRs is really watching if you buy a $5 smoke detector to replace a broken one though, (since the paper work and handyman are more trouble than they are worth in those situations) just don't try to deduct the cost of the alarm.

EDIT; forgot we are talking roth
« Last Edit: April 14, 2017, 11:59:52 AM by hoping2retire35 »

SeattleCPA

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Re: Using Roth money for real estate
« Reply #14 on: April 14, 2017, 11:33:07 AM »
I'm doing this right now: using my Roth IRA investments for a down payment on a house. So, I've been looking into details and here are the relevant ones for RE investing:
1. You can withdraw any and all contributions tax- and penalty-free, you just have to report it on your next tax return (Form 1099R);
2. You can withdraw up to $10K in earnings tax- and penalty-free, as long as you're using the money as a "first-time home buyer", which just means you haven't paid interest on a mortgage loan for the past 24 months (i.e., you can have owned a home in the past, just not have paid interest on a mortgage loan within the past 24 months);
3. The Roth IRA "ordering rules for distributions" specify that you must first take out your contributions, then any rollovers, and then earnings (i.e., you can't take out earnings first and then contributions);
4. To withdraw earnings, you must have been paying into the Roth IRA for at least five years.

Did you remember to include the 990-T? Your Roth-IRA now needs to file a tax return...