Early IRA withdrawals and Self Directed IRA's

[mdebluz]

Hello,

I am very grateful to have found this site! Thanks to everyone who reads and participates. I feel like a drowning person who doesn't know what to do with the life preserver!!

I have a two part question.....I got a divorce about a month ago and will be getting the 401K and retirement settlement in a few weeks. I want to invest in a rental property that is a great bargain. However, I am told today that for every 10K I withdraw (at age 54) I will need to draw another 6,700 to cover the 10% penalty and to pay the taxes next year...
Wouldn't it be less than that if it is 10% and being in a 25% tax bracket??

I then found some websites that talk about the Self Directed IRA's. Does anyone have experience with them, and are they on the up and up and worth it?

Thanks for your input!!

 

[REWahoo]

I can't help with your second question, but as to the first...

If you are in the 25% tax bracket and the added withdrawal/income doesn't move you to a higher one, looks like you'd need to withdraw a total of $15,400 to net $10,000 after taxes. This is based on paying 25% + 10% ($5,390) in taxes on your withdrawal, leaving you with $10,010.

 

[kyounge1956]

Hi mdebluz, I'm just brainstorming here but would it be possible to use "substantially equal payments" to pay the mortgage on this rental, rather than withdrawing a lump sum in cash? I think you could eliminate the 10% penalty that way, but don't know whether it fits the other needs of the purchase. Also if you look down at the bottom of the page when viewing this thread, there are links to several others concerning self-directed IRAs. I haven't read any of them (yet), but the answers you're looking for may be there. Might be something in the FAQ too.

I read a book several years ago about using a self-directed IRA to invest in real estate. Two caveats: (1) the book was published in 2003 and some of the rules may have changed since then, and (2) I've never invested in real estate myself, in or out of my IRA, so I don't know if the is the real McCoy or smoke and mirrors.

P.S. I see this is your first post. Pleased to meet you. How 'bout introducing yourself in the "Hi, I Am...." section?

 

[jazz4cash]

I can't help with your second question, but as to the first...

If you are in the 25% tax bracket and the added withdrawal/income doesn't move you to a higher one, looks like you'd need to withdraw a total of $15,400 to net $10,000 after taxes. This is based on paying 25% + 10% ($5,390) in taxes on your withdrawal, leaving you with $10,010.

Isn't it $2500(25% tax) plus $1000(10% penalty)= $3500. I just did one and that's the way it was figured.

The substantialy equal payments suggestion (aka 72t plan) would be a better way to go, but might not produce a big enough lump for a down payment.

 

[kyounge1956]

Isn't it $2500(25% tax) plus $1000(10% penalty)= $3500. I just did one and that's the way it was figured.

The substantialy equal payments suggestion (aka 72t plan) would be a better way to go, but might not produce a big enough lump for a down payment.

I think the tax would be 25% of the total withdrawal, not 25% of the amount of money needed for the house. So $10K=total amount-(25% tax +10% penalty)=total amount-35%=0.65*total amount---->total withdrawal=$15,384.62

 

[chinaco]

mdebluz... just my 2 cents. I am sure some will disagree.

IMO - buying and renting living space (as a land lord) on a small scale for many people is a poor choice. One holds debt and an asset that costs (Prop taxes, insurance, maintenance,etc)... plus the person's personal effort/work. Most small landlords just wind up owning a job for low/no pay. If it were me, I would compare the projected returns to other legitimate and viable investments such as an equivalent portfolio of broadly diversified stocks and bonds in a low cost mutual funds like VG and project a your anticipated net income streams or FV before and after inflation (several ways) with best case and worst case scenarios (using historical data) to compare.

I have never owned rental property for a reason. I saw my father do it on a relatively small scale (but he owned multiple units... apartments). A lot of effort with low yield and a lot of hassle. In the end, after about 25 years, he owned the property and sold it. Most of the income stream along the way paid expenses. I remember his comment after he sold it... He thought it was a lot of work and he made little money out of the overall investment. I think some people have made been able to make reasonable returns. But the success of it depends on many variables and the real analysis of it is difficult. Plus, real estate is not very liquid, if you need to exit... it can be a challenge.

If you are a newbie.... I would recommend that you think about it long and hard and do some analysis. Talk to some people doing it... better yet talk to some people who did it in the past for the real scoop.

 

[mdebluz]

Thanks for the heads up about the "Hi I'm" section. I did that.

Like I said I am really new--- two days---- into looking at my options. I made the offer of the rental agency property in February. It is a short sale in a high traffic resort area. There are lots of properties for sale but this one is unique and has a high rental return already. It is nearly brand new and should net around 13K a year after all the agencies fees. I am still responsible for utlities, etc. I also plan on using it for a retreat for the employees of my nonprofit now and then.

I can get 100 % financing and not have to take any of the IRA for the down payment. As I state in the Hi I'm thread, I am now wondering if I should take a SEPP to make the payments now and rat hole the money I would be paying and as much as I can afford into another IRA. Sort of seems like robbing Peter to pay Paul.
IT IS ALL VERY CONFUSING!!!