457b [use funds to buy real estate]

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
heyyou567
Posts: 1
Joined: Mon Jun 19, 2017 3:27 am

457b [use funds to buy real estate]

Post by heyyou567 » Mon Jun 19, 2017 3:32 am

I plan on retirement in another year,
I have a 457b plan
Want to invest in a Multi-family home.
can i use the 457b plan to purchase the home.. or are their stipulations as far as using the money towards a purchase after i retire?

sweeden22
Posts: 29
Joined: Fri Nov 18, 2016 6:11 am

Re: 457b [use funds to buy real estate]

Post by sweeden22 » Mon Jun 19, 2017 5:38 am

Once you stop working, there will not be an issue using the funds for such purchase.

However, unless this is a Roth 457b, you will be paying income tax on whatever you withdraw. Therefore, typically people make withdrawals over their retirement.

If you have a large sum and you withdraw it all in the same year, you may be paying taxes in a very high tax bracket.

Remember, the 457 will keep making money for you, or it could rollover to a Vanguard IRA with perhaps lower fees than your 457 plan. You would have to figure out if investing in this property is going to earn more money than saying in the market, factoring in the income taxes you would pay on withdrawing so much money all at once.

User avatar
jimb_fromATL
Posts: 2187
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: 457b [use funds to buy real estate]

Post by jimb_fromATL » Mon Jun 19, 2017 6:42 am

How much would you be considering paying for the property?
Would you be living in part of it?
How much rent do you think it would bring in?

How much income will you have from any pensions and social security?
Does your state have an income tax?
How is your 457 money invested and how much has it been earning?

Do you own your own home now?

Like poster sweeden said, you can do anything you want with the money after you retire. But IMO it's probably a really bad idea.

The first problem is that taking out any significant amount at once would almost surely put you in a much higher than normal tax bracket. Chances are that the huge cost of taxes up front and the loss of compound interest earnings on all of that money for the rest of your life would be far more than any profit you would make from renting it out.

Another problem is that lenders and their shareholders are not in the rental business and are not interested in risking their money speculating on how much rent might come in at some time in the future. They normally don't count potential future rental income in qualifying for a mortgage.

Therefore, unless your guaranteed income from any pension and social security is enough to qualify for a mortgage, you'll probably have to pay cash for the property. Not only would that cost more in taxes and consequent loss of compound interest earnings on all the cash for the rest of your life, but without the advantages of the tax deduction for mortgage interest and the leverage of principal being paid back with OPM (Other Peoples' Money) you would be paying more income tax on the rental income.

You're also putting your retirement at risk by tying up a lot of money in a single property. If something goes wrong with the area or the economy, you could suffer a loss in value and/or loss of income that you might never be able to make up.

So ... in my opinion, if you do want to invest the 457 money in real estate, chances are it would be better to roll it over to an IRA, then invest that money un a REIT (Real Estate Investment Trust) mutual fund in the IRA. That avoids the big tax hit up front, reduce your liability, avoids having to manage it yourself, and spreads out the risk over a lot of properties too.

jimb

Post Reply