My Mom(63) has a 457 retirement plan that she would like to borrow $20,000 from with the intent of lending me the money so I can invest in my first real estate property. I want to make sure that the process is done correctly so that we don't pay more taxes or interest than is needed.
What is the best way to borrow the money?
What type of account should I put the money in while I am looking for a property?
Any other tips or suggestions would be greatly appreciated!
@Jason Wutzke Your mothers 457 plan may have a loan provision that allows borrowing from the balance accumulated in your account. Plan loans, if allowed, are generally limited to 50% of your account balance or a maximum of $50,000, whichever is less, and generally must be paid back within five years with interest. The key is whether the plan has a loan provision or not. 457's are not required to allow loans from their plans. Also key to remember is there are significant penalties if you don't pay these loans back with in the 5 year repayment period. Also keep in mind that if your mom is fired/retires or otherwise leaves her employer the plan will require her to pay the loan back within I think 30 days or the IRS deems that she has received a distribution and that is subject to taxes and penalties.
@Scott Vance Thank you for your response. She called and they told her because she is retired, they would not allow a loan. She would need cash out and they will take 20% out of distribution for taxes. I believe she has the option if they take it out or she pays later, that is her % and she prefers to have it taken out. Is there any way such as an exchange or transfer that would help reduce the tax penalty on her end? I really wanted this to be mutually beneficial for the both of us.
@Jason Wutzke The money coming out of a 457 would be taxed as earned income. So to reduce the tax to her I would look at making sure that taking the distrubution does not bounce her into the next higher tax bracket, maybe taking some out now before the end of 2016 and then taking some in 2017 could do that I don't know for sure you would need to have a tax advisor take a closer look. Also the possibility of her bunching up some deductions and maybe even some tax credit exists. Also if you can shield some income from being included in her AGI would be helpful too. Alot of possibilities but without specifics as to her situation nothing that I can firmly recommend.
@Scott Vance Thank you very much! You have been a big help!
If your mom can become self-employed by doing part-time self-employment activity (e.g., babysit the neighbors kids) she can open a solo 401k and transfer the 457b plan to the solo 401k and then she can take a 401k participant loan.
@Mark Nolan Thank you for your response! Unfortunately there was not enough time to open accounts and transfer. What I ended up doing is I extended the loan to 4 years so that the interest she gained would cancel out what she will pay in taxes. Found a way for it to be mutually beneficial because she would have had to start cashing out and paying taxes in a few years anyways.
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