Cash in 457 Plan to Pay Off Rental Property?

[Ryan K.]

Ok here’s the scenario and rationale:

My dad retired a few years back, he’s got a great pension. He parked his buyout money in a 457 plan.

He’s got a good rental property that fetches $1450 per month. What he owes on the property is what he has parked in the 457 roughly $80k. He was looking at refinancing the rental to kick off a higher cash flow.

As we were talking he said, “I could just pay off the balance and have even better cash flow and 100% equity. (The home is worth $275k).

Obviously cashing out would cause an income tax hit. But the CoC return, if he used the 457 to payoff the mortgage, would be a 14%. That easily outperforms the 457 year over year.

Just curious if anyone has seen anything like this or has experience doing it? Or are we totally nuts in our thought process?

[Joe Villeneuve]

No, no and NO!!

Your 457 is making you money where it is at no cost to you.  If you take it out and "spend it" (that means it costs you money), you lose the returns from the 457.  All you would be doing is paying for equity in the rental...that the tenant is already buying (as in cost to the tenant). That means the money in from your 457 is worth less.  You're not only not gaining anything, you're actually losing money.

If you want to use your 457 money in REI, use it as a down payment on a new property.