Using Roth IRA funds for real estate investment?

When i first started working (2+ years ago), I started depositing money into a Roth IRA to save up as a down payment for my 1st house.

I have roughly $9,500 in there, and recently started researching real estate investments. I’ve lined up private money and I’m most likely making a deal next week.

Since I’ve never purchased a house before (principal or investment), can I free up and use these funds in the IRA for this investment, without penalty? It’s a rehab project

You’ll need a custodian that allows this type of investment. Keep in mind you cannot perform any of the rehab work. You can only direct it. Any physical activity on your part will trigger a penalty.

What do you mean by a custodian? And if i hire a contractor i’m good right?

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If any of the earnings your contributions generated in your Roth IRA are withdrawn, ordinary income taxes will be assessed on the withdrawal.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.

Are you guys sure you can take the principal out before 5 years and not pay a penalty? I’m reading now that this is an unqualified distribution and will have a penalty attached to it

found this site that has a comparison list of self directed IRA.

Pensco and Entrust seem to have alot of educational information on their sites.

The original question is specifically regarding a ROTH IRA that was funded with after tax contributions from W-2 earnings and not funded by funds converted from a Traditional IRA.

I interpreted the original poster’s intent is to empty his Roth IRA to invest outside of the IRA rather than invest from within a self-directed IRA.

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.