Should I Withdraw Money from Retirement Accounts To Invest?

question_mark_bookshelf_400_wht_9074Many times, we are presented with a unique and even once-in-a-lifetime investment opportunity. For many of us, though, our retirement accounts are our biggest single asset that’s convertible to cash available to invest.

So is it worth it? Consider:

If you liquidate all or part of your IRA, 401(k) with a former employer, or another tax-advantaged retirement plan such as a SEP or SIMPLE, you would have an immediate income tax liability on amounts withdrawn. If you’re pulling out a large amount, this could cause you to push into a higher marginal tax bracket and disqualify you from some other tax benefits.

In addition, if you are below age 59½, you are also on the hook for early withdrawal penalties of 10 percent (the age threshold is 55 if you have already left the company and you are withdrawing from a 401(k).

To complicate matters further, if you are tapping a 401(k), your 401(k) plan administrator must withhold 20 percent of your withdrawal to pay income taxes. However, your income taxes and any early withdrawal penalties are not calculated on just the amount you get to keep, but on the entire amount of the withdrawal. Throw in state taxes on top of that, and your combined tax and penalties for pulling money out of your retirement plan to invest can be daunting indeed, and even approach 40 or 50 percent before you can invest your first dime in the opportunity.

There is a better way: the Self-Directed IRA.

How it works

The Self-Directed IRA is simply an individual retirement account that you exercise greater, more personal control of compared to conventional IRAs and other retirement accounts. Instead of investing your money in publicly traded stocks, bonds and mutual funds via an investment company, as most people currently do, the Self-Directed IRA owner can invest in any number of other kinds of assets. Here are some of the most common choices for Self-Directed IRAs:

o   Closely-held businesses, including LLCs and partnerships

o   Franchise opportunities

o   Rental property

o   “Fix and flip” real estate

o   Private equity

o   Private placement

o   Venture capital

o   Private lending

o   Hard money lending

o   Land banking

o   Precious metals

o   Foreign real estate

o   Tax liens and certificates

o   REITs (publicly-traded and non-traded

And more.

Choosing a Self-Directed IRA may allow you to access the liquidity in your retirement account to make lucrative long-term investments without having to incur any kind of immediate tax liability or penalty of any kind. All you have to do is this:

  • Open an account with American IRA, LLC, and deposit funds. We can do a trustee-to-trustee rollover directly from your existing financial institution.
  • Provide us written direction on what you want your Self-Directed IRA to purchase on your behalf, from whom and at what price.
  • Comply with IRS rules and regulations regarding self-directed retirement accounts.

So you don’t have to incur the heavy fees and penalties of liquidating your IRA in order to participate in that investment activity. However, you should not rely on being able to take income from the investment prior to age 59½. Any income you take from a Self-Directed IRA are subject to income taxes at any age, and for those younger than age 59½, the 10 percent penalty applies as well, except under a limited set of hardship circumstances defined by law.

American IRA does not charge a percentage of assets under management. Most Self-Directed IRA administrators charge you based on the size of your account or the number of assets in your account. We only charge you for the services you use, giving you the freedom to have unlimited assets and unlimited account values for one low set fee. In the long run, that can save many thousands of dollars versus the conventional assets under management model or mutual fund expense ratio.


The law imposes very few restrictions on what you can own within a self-directed account. You can invest in nearly any asset class, as long as you don’t invest IRA assets in life insurance, collectibles, art, alcoholic beverages, gems, jewelry and certain forms of precious metals that are of uncertain or inconsistent purity.

The law also prohibits self-dealing within your IRA. That is, you cannot use your IRA to buy from or sell to yourself, spouse, ascendants or descendants and their spouses or fiduciary advising you on your IRA. You also cannot borrow from or lend money to your IRA, nor can any other prohibited individual described above, though your IRA can borrow money from other sources.

Withdrawals and Distributions

Once you have established your Self-Directed IRA, it is subject to the same rules and regulations concerning withdrawals and distributions as any other IRA. For example,

o   Withdrawals prior to age 59½ are subject to a 10 percent penalty

o   You can make systematized withdrawals penalty-free under IRC Section 72(t).

o   You can make penalty-free withdrawals under certain hardship conditions, like any other IRA.

o   You may have to make required minimum distributions after you turn age 70½.

o   Restrictions on new contributions apply, depending on your income.

o   If you qualify, you can convert assets in a Self-Directed IRA to a Roth IRA. However, you will have to pay income taxes on any amounts you convert.

Other Options

You can also choose to self-direct within a Roth IRA, solo 401(k), SEP IRA or SIMPLE IRA, and even within a Health Savings Account. The option you would choose depends on your own unique circumstances, including income, liquidity, and assets you want to invest in.

To learn more, visit us online and attend one of our introductory online seminars at no obligation or cost to you. Or give us a call at 866-7500-IRA(472). We look forward to serving you.