Early IRA Withdrawal

• Withdrawing money out of your IRA before you turn 59 1/2 results in a 10 percent penalty on the amount withdrawn. This penalty is levied at the time of the withdrawal. The only exception to this is an allowed withdrawal under a financial hardship application. If you wait until you are 59 1/2, you can forgo the penalty, but will still incur the tax consequences.
  
  

Possible Loss on Liquidation

• In order to withdraw cash from your IRA, you must sell or cash out some or all of the investments held. If you have invested in the stock market, you may be withdrawing at a weak point in the market and incur losses on the sale. If you have to cash in fixed-income products such as GICs, there may be further penalties for early conversion. When considering the investment return you will receive on the rental property, you must figure in any losses you have had to take on cashing out your IRA. It can take a long time to recoup those losses through investment income or gains on the rental property, making the withdrawal less financially attractive.
  
  

Tax Consequences

• On top of the penalty, you must pay income tax on the total amount withdrawn from your IRA in the year of the withdrawal. If you are taking out a substantial amount, your tax bill can be large. You will have to take out enough to pay the tax owing, plus have enough left to invest in the property. If you withdraw enough to bump you into a higher tax bracket than the one you were in when you contributed to the IRA, you have a further net loss on the withdrawal.
  
  

Effect of the 10 Percent Penalty

• The 10 percent penalty on an early withdrawal from your IRA also eats into the net amount you have available for investing in real estate, and you will have to factor that into the amount you withdraw. You must also consider that loss when calculating the potential gains from the rental property. Making up that 10 percent can take a significant amount of time, depending on the strength of the rental housing market. The ultimate result is that you have taken a reasonably safe retirement investment and turned it into a volatile investment. If the real estate markets tank, it can have a significant negative impact on your retirement plans.