How can I access my 457 retirement funds to invest in RE?

Question

Hey everybody- Just got introduced to BP and have already learned a lot just from following some of your posts, thanks!

I have recently retired from LAFD and would like to use my 457 deferred comp retirement funds to invest in RE. I have been told that it can be rolled into a self directed LLC, but I'm not sure if that is accurate info, and frankly I'm such a newbie I don't understand how all of this works. I keep reading about folks using the 401K's, but not much mentioned about 457's.

I have about 500k in the account. My hope is to use about 300K as down payments for rentals (I have the rest diversified in stocks etc). I can pull the funds straight out, but if there is a way to avoid the big tax hit, that sure would be great.

Any counsel you can give me is appreciated!

Linval T. · Answer

@Kevin Lillenberg

Welcome to BP. Actually, I listened to podcast 017 last night and it addressed your issue. Listen to it and you will get a ton a pertinent details and contact @Jeff Brown for additional guidance.

However, this site thrives on interactions and as such we encourage two way exchanges and look forward to educational and thought provoking ideas relevant to REI.

Again, good luck and best wishes in the pursuit of your goals.

Danny Cerecedes · Answer

What's up Kevin!

I'm new to BP as well and live in SoCal but work for the Central County FIre Dept up in the Bay Area. We recently consolidated which allowed me to pull my 457 money out and invest into some buy and hold passive income properties. I believe you can do a SDIRA but I had heard that you don't get to write off the interest on loans you may be carrying on your rentals...that could be some bad info that was given to me.

I ended up paying the state and federal taxes and my thought was to get some cash flow properties into my portfolio rather than having my money exposed to the stock market (just my thoughts though).

An example of one of my rentals is positive cash flow per month of $500. I get the depreciation write off each year and on top of that my renter is paying down the principal balance thus building me equity. My goal is to build my portfolio with as many positive cash flowing properties as I can to supplement my pension. I have about 18 years left of service.

Are you City or County?

Hope this helps brother!!

Kevin Lillenberg · Answer

• Hey everybody,
• It's been a few months since I last posted so I thought I'd update you as to how I put your advise to good use so far...
• First I did some research as to where in the country you can still invest in rental houses at a low enough cost to still have some positive cash flow. I looked for cities that have a strong employment ratio, that have historically had a steady increase in home appreciation and has begun to make a steady come back after the plunge in 2007.
• Of all the of the top areas that met that criteria we chose  Austin TX and Sarasota FL, because we are familiar with those areas and have family connections there.
• I decided to pull the down out of my 457, take the tax hit, and invest in a rental home in Austin. We paid 175k for a very nice 3 BR/ 2 bath house on a quarter acre and rented it two days after it was listed for $1500, giving me a + cash flow of about $500 after tax, insurance, and 100/mo put aside for surprises.
• If you're interested in Austin, Deb Groom is an excellent realtor. She really worked hard to get us a great deal and helped us buy what WE were looking for, not just what she wanted to sell, if you know what I mean. She even oversaw some repairs, helped us get a renter in there, and did all the back ground checks for a small fee.

Since then we have contacted Mark Nolan with My Solo 401k . Now that I have a rental property in Austin, we are considered self employed and qualify for a solo 401K retirement fund.  Mark helped us set that up and we rolled the majority of our funds with the hopes of now holding our future properties, or other investments, within the 401k leveraging the mortgage with a non- recourse loan (which are required in solo 401k s)

A word about Non-recourse loans: there are only a hand full of banks that will do these, they are very picky about which states they will even loan in and the property they'll loan on, they require 35-50% down and a higher interest rate. On the plus side, you are deferring your taxes by keeping the property within the 401k.

If anybody has a non-recourse lender they liked working with, please let me know.

Right now we are trying to determine if its best to buy the next Sarasota property using a non-recourse where 40-45% down is required, but tax is deferred, or take the tax hit now but only have to put 20% down. Any advise on this is appreciated!

•

Kevin Lillenberg · Answer

Hello again-

I've learned so much from reading other people's posts and articles especially including those aimed at new investors- Thanks!

In the short term I've decided to access some of my 457 deferred comp funds, and take the tax hit to be prepared when I find my first buy and hold rental. For the future I am interested in info about the possibility of moving the majority of those funds into a "check book" style of Self Directed fund, and agree with you all completely that I need a pro to help me set this up. Can anybody recommend a good tax attorney in the Santa Clarita/Los  Angeles area, specifically with understanding of the 457 limitations...?

Mark Nolan · Answer

@Kevin Lillenberg

Anytime. As you can see, Bigger Pockets is full of great information.

BP is full of useful resources such as forums and blogs.

You will find all kinds of useful information under “Learn.”

Kevin Lillenberg · Answer

Wow- Thanks for all the information and for responding so quickly! So much to consider...I will chew on this a while and get back to you when I've learned a bit more- Thanks again!

and Danny- I retired from LA City 97's.  I sure don't envy your commute, but I hope you are enjoying your job as much as I did- 33 years went by way too fast- good for you for getting started in RE so young.

Josh McCullough · Answer

I'm 10 years into my Firefighting career and have a 457 as well.  I contacted our departments nationwide rep, and he said that I could not withdraw for real estate investing.  Congratulations on your retirement @Kevin Lillenberg! I'll be following this thread!

Mark Nolan · Answer

@Kevin Lillenberg

In a nutshell you may qualify to open a self-directed solo 401k if you are self-employed. The 457 can then be transferred to the solo 401k and invested in real estate. The following IRS publication covers the solo 401k plan in more depth.

http://www.irs.gov/publications/p560/ch04.html

On the other hand, if you are looking to flip real estate using retirement funds, neither the solo 401k nor the IRA LLC may be a good fit because of UBIT, a type of tax that applies to IRAs and solo 401k plans when flipping is performed inside an IRA or a solo 401k.  Instead, the ROBS 401k may be a better fit as it will not be subject to UBIT. To learn more about he ROBS 401k, visit the following IRS website.

http://www.irs.gov/Retirement-Plans/Employee-Plans...

Brian Eastman · Answer

@Kevin Lillenberg

Since you are retired from LAFD, you would have the ability to move all or part of your 457 plan to an IRA of your choosing.  @Kyle J. makes a good point about the ability to take distributions penalty free from the 457 plan, so you will certainly want to consider that as you determine your rollover amount.

You would certainly have the option of a Checkbook IRA LLC.  This is a very nice format for having full control over your retirement savings and being able to diversify into real estate.  Such a plan can also invest in traditional stocks, etc.

If you are self employed in any way, you would want to explore the Solo 401k format.  This plan also provides checkbook control, but has a few advantages over the IRA LLC format.

You can leverage real estate investments with a mortgage.  The loan has to be non-recourse (no personal guarantee from you).  In an IRA, there are tax implications associated with the use of debt-financing.  This tax known as UDFI does not apply in the Solo 401k format.

Do some additional research here on BP and the internet in general.  The best way to get an understanding of your options is to speak with professionals in the field - which would include providers of these plans as well as your independent tax counsel.

Best of luck as you get started!

Kyle J. · Answer

Welcome to BP @Kevin Lillenberg.  It is possible to rollover this type of plan to a SDIRA so that you can invest it in real estate, but there are some things to know first.  For instance, since you're already retired, you'll need to ask yourself when you might need the money in your plan.  A big advantage of a governmental 457(b) plan is that it is not subject to the age 59-1/2 withdrawal rule. This means there is no 				10% penalty for early withdrawal at retirement even if you are less than 59-1/2 years old (which I presume you are).  However, if you roll the plan money into another plan (like a 401k, IRA, etc),	you will lose this no early withdrawal penalty benefit.  Since you're dealing with a fairly large sum of money (and a potential tax burden if you do it wrong), I'd suggest consulting a tax professional who can go over your individual circumstances and help you make the best decision going forward.

How can I access my 457 retirement funds to invest in RE?

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