You can make a tax-free, penalty-free withdrawal of any or all of the principal you contributed directly to a Roth IRA any time you need to.
If any of the earnings your contributions generated in your Roth IRA are withdrawn, ordinary income taxes will be assessed on the withdrawal. Additionally, since the withdrawal will be used to acquire an invesment property (not your primary residence), a 10% early withdrawal penalty will also be assessed.
If you can wait until your Roth is five years old, then you can withdraw earnings tax free and penalty free provided you use the withdrawal to purchase your primary residence as a first time homebuyer. If you use the withdrawal to purchase an nivestment property instead, then the withdrawal is taxable as ordinary income but not subject to the early withdrawal penalty.
There are other exceptions that let you waive the early withdrawal penalty, but I limited my answer to the real estate related use of your withdrawal.
^^ great insight, thanks. My question is, in 5 years, even though i’ve bought numerous investment properties that have not been my principal residence within that 5 year period, can i still use the earnings as a down payment towards my first time PRINCIPAL residence?
The custodian is the company that holds your IRA? Schwab, Fidelity, etc. If you follow Dave’s advice, you can take the money out and do what you want with it. If you want your RE holding’s gains to grow tax free and withdraw the funds from your IRA tax free, you will need a company that allows real estate as an investment options. There are many self-directed IRA custodians that allow this investment.
You’ll be fine as long as you only provide direction. You cannot perform any work (including something as simple as picking up a piece of trash from the front lawn) and you can only use IRA funds to pay the contractor. You cannot use your own money or borrow money using the real estate as collateral to pay for anything. Those are considered prohibited transactions.
I don’t think you’ll find a custodian that will fund improvements to a property that you personally own. That violates several IRS rules regarding IRA investments.
You may find a custodian that will fund the purchase of a rental property within the IRA, but again, not if you will be personally guaranteeing the debt or managing the property. Rent income and all expenses will need to be run through (paid by) the IRA administrator. This service is not inexpensive.
IRA rules prohibit you from have any involvement in the daily operation or personal benefit from an IRA investment.
If you want to manage the rehab, manage the property or receive rent income, you’ll have to follow Dave’s advice and withdraw the funds from the IRA and suffer whatever tax consequences apply.