Is it possible to use the funds held in a 457(b) account, upon retirement, to purchase residential real estate as an investment/income source?

I know I could take the money out without age penalty (I’ll be mid 40’s) but I know I’ll be stuck with income tax if I just take a disbursement. But is it possible to invest it directly into property so it doesn’t have to be considered income?

I wouldn’t necessarily need the monthly income either... it could potentially go back into the 457 account? If that is allowable.


Just trying to think through options for my 5 year plan.

If you want to do that you need to consult an investment professional and an attorney. I can’t imagine that you could invest in residential real estate of your choosing within the plan. You would have to roll over your account into an IRA. However, if you do that, you run a risk of violating what are known as the Prohibited Transaction rules. In general, you can’t put your home into your IRA. It must be purely an investment, not your own home. Google is your friend if you want to do your own research on this. If you violate the Prohibited Transaction rules your entire IRA would then all become taxable in the year you violate the rules. You don’t want to do that.

That’s why I say that, if you want to do it, make sure that you hire competent investment and legal counsel. The potential penalties for mistakes are severe.

If the funds are with your municipality it’s going to be difficult because their plan rules probably don’t allow it. If they will let you do an inservice rollover to an IRA it’s possible. It’s tricky. I have a client that does this and they buy some of the house in their IRA and some in a corporate entity they control. Pretty sure can’t live in the house has to be rental. The reason it’s a mess if you go 100% owned your IRA is what if you need to put a roof on if the Ira pays for it then it could be seen as a disallowed distribution etc and it’s a tax nightmare. Anyway their is a local ( in SF ) company that is an IRA custodian that specialises in buying Real estate and other non traditional assets inside IRA. I can get you their name if you want to pursue.

Honestly I’d avoid as it’s full of potential traps that if your not really careful could cost your dearly due to the IRA nature of the structure.

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posted December 23, 2020 05:40 PM
Is it possible to use the funds held in a 457(b) account, upon retirement, to purchase residential real estate as an investment/income source?

^^^^^^^^
NO. After 59 and one half and in special limited circumstances. This is a red flag for the IRS and they will come after you for the money plus penalites etc. You should consult a tax specialist for a definitive answer.

Well, it wouldn’t be a home we lived in , ever. Wholly separate from our residence.

I have been googling but only had marginal success. Looks like moving the money to a self-directed IRA is a way to do it, but as I understood it moving to the IRA is a taxable event anyway.

If it comes down to it that I’d have to pay income tax then that is what it is and figuring that stuff out now is the reason I’m thinking about it. Plans must be made.

If your 457b allows you to roll it over to an IRA, which should be allowed if you are retired. If you are actively working it is possible but not probable that they would allow it. If they allow it, you can rollover to s self-directed IRA doing a direct roll-over there would be no tax implications. The money is moving from one tax-deferred account to another. Once the self-directed IRA is set up you can purchase property, physical gold, etc. As others have said you can utilize the property, including specified family members. All costs (property taxes, insurance, maintenance) need to come out of the IRA and all proceeds (rent) need to go into the IRA.

If you have a lot of retirement funds it may be worth looking into for diversification or if you love and are knowledgeable about real estate.

If eligible rolling into an IRA (not self-directed) may be beneficial because it would open more investment choices (more mutual funds, ETFs, individual stocks (if you are into investing), Real Estate Investment Trusts (public not private), and bonds or bond funds (not a fan right now because of historically low interest rates).

Your financial situation and goals should help direct the direction you should go.

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Originally posted by thumperfbc:
Well, it wouldn’t be a home we lived in , ever. Wholly separate from our residence.

I have been googling but only had marginal success. Looks like moving the money to a self-directed IRA is a way to do it, but as I understood it moving to the IRA is a taxable event anyway.

If it comes down to it that I’d have to pay income tax then that is what it is and figuring that stuff out now is the reason I’m thinking about it. Plans must be made.

You should be able to roll it over to a traditional IRA (not a taxable event). You most likely can then buy real estate with those funds but you need to consult a CPA and most likely a real estate attorney who have experience with this strategy, and who know how to structure and title the investment.

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As others have said you can utilize the property, including specified family members.

Are you sure about that part? As far as I've read, the IRA owner or family can not use the property. It must be a rental or strictly investment only.

A nationally recognized tax professor would tell us every quarter, "The IRS will tell you tax law is 90% black and white, 10% gray. But just the opposite is true".

There may be a way to do what you want, but it might be you have to dot the i's and cross the t's just right. So it would be very worth while to consult with a tax specialist.

Yes, it can be done in a self directed IRA.. It has to be done through a custodian that makes the management decisions. It can be expensive. When the time comes for minimum distributions all sorts of problems can appear. What if there is not enough cash generated to make the requiredminimum distributions ?
Sell part of the property?

When the neighbor farm came up for sale I looked into it , my CPA shot the idea down.

He said if you do this don't let the IRS catch you making improvements , hunting or even picking aapples off the tree. Conversion is the idea here.


I would like to hear ifrom anyone that was able to make this work.
[FLASH_VIDEO]

As others have said, when you need to start taking your RMD there are more problems that can occur. Not only do you need to have sufficient cash to make your annual RMD, but you also have a valuation issue. The RMD is based on the fair market value of your IRA on the last day of the prior tax year. How do you update the value every year? Do you need to get an appraisal? If not, how to do you compute the value? Will the IRS accept your valuation methodology?

Just because you CAN do it doesn’t mean that it is a good idea to do it. Is the risk of having your entire IRA taxable in one year (due to a mistake) worth the incremental return that you might get on rental real estate? No one on this board can make that call for you. You need to consult tax, investment and legal professionals to get the facts on what exactly you want to do. Then you need to decide if the risk is worth it.

I knew nothing of RMD’s, but reading about them on the IRS website informs me they don’t come into play, currently, until about age 70.

Again, I’ll be “retiring” at 44. That gives a good long time to make moves until it becomes an issue.

That all being said, it certainly seems cleaner and easier to simply take the money out of the account and pay the tax man his 24%, or whatever it will be at that time.

Definite food for thought though. I’ll be doing more reading on options.

When the time comes to pay a professional for their evaluation of the situation, who is that professional? CPA? Tax attorney? Real estate attorney? Retirement person?

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That all being said, it certainly seems cleaner and easier to simply take the money out of the account and pay the tax man his 24%, or whatever it will be at that time.

If you are still talking about at your "retirement" at 44 you are almost certainly wrong unless you need the money. Rolling it over to an IRA and deferring the tax, growing entire balance, almost always the best answer.

If you are talking about at age 70.5, then part of your plan could be to hold the real estate in an IRA until closer to then, and THEN sell it and have funds available to invest and make RMDs.

As others have said, holding something like this in tax deferred account at 70.5 presents all sorts of challenges. I had a client who left behind in an employer plan a life policy. First, it was probably stupid for it ever to have been there. Second, it was impossible to take a partial distribution due to policy design/restrictions.

Kkina is correct. Neither you nor any family member would be able to use the property without triggering the Prohibited Transaction Rules. They would be considered “disqualified persons”. The following is from IRS Publication 590-A “Contributions to Individual Retirement Arrangements”:


Prohibited Transactions
Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are some examples of prohibited transactions with a traditional IRA.

Borrowing money from it.
Selling property to it.
Using it as security for a loan.
Buying property for personal use (present or future) with IRA funds.


This is an Image: caution.gif


If your IRA is invested in nonpublicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your account may be increased.


The IRS actually has a fairly user friendly website. Search for IRA’s and you will get more information that you will probably want to read. That’s another reason why you want to hire competent counsel to go over it with you. They get paid to read and understand that information.

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If you are still talking about at your "retirement" at 44 you are almost certainly wrong unless you need the money. Rolling it over to an IRA and deferring the tax, growing entire balance, almost always the best answer.

^^^^^^^^^^^^^^^^^^
This is the right answer. I have consulted all of the above and the IRS still chose to audit my retirement accounts. It was a special project. My CPA spent two days with them, no errors were found but it cost me three thousand dollars to pay my CPA.

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If you are talking about at age 70.5....

Didn't The Secure Act increase the required minimum distribution (RMD) age from 70 1/2 to 72?

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Didn't The Secure Act increase the required minimum distribution (RMD) age from 70 1/2 to 72?

Yes. My bad.

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Originally posted by thumperfbc:
I knew nothing of RMD’s, but reading about them on the IRS website informs me they don’t come into play, currently, until about age 70.

Again, I’ll be “retiring” at 44. That gives a good long time to make moves until it becomes an issue.

That all being said, it certainly seems cleaner and easier to simply take the money out of the account and pay the tax man his 24%, or whatever it will be at that time.

Definite food for thought though. I’ll be doing more reading on options.

When the time comes to pay a professional for their evaluation of the situation, who is that professional? CPA? Tax attorney? Real estate attorney? Retirement person?

Just another thought.

You could put a mortgage on the rental property then rather than taking all the money needed to purchase the property in a single year, you could make distributions periodically in amounts sufficient to cover the mortgage payments which would spread the distributions over many years and likely result in less tax and allow the IRA account to continue to appreciate tax deferred based on higher values.

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Originally posted by Sailor1911:
Just another thought.

You could put a mortgage on the rental property then rather than taking all the money needed to purchase the property in a single year, you could make distributions periodically in amounts sufficient to cover the mortgage payments which would spread the distributions over many years and likely result in less tax and allow the IRA account to continue to appreciate tax deferred based on higher values.

This is the working plan as it starts now.... It seems to make the most sense... An initial disbursement of $20,000, or whatever is needed to secure the property and cover a year of mortgage. Hopefully, the rental income would shortly cover the mortgage payment plus and maybe wouldn't even need an additional disbursement the following year.

Doing it this way would probably allow for the purchase of *multiple* properties rather than just one. I wouldn't want to start too big too fast, but it seems like a decent enough idea.

This topic did produce another question in me.... regarding converting this 457 to a ROTH IRA, but I'll save that discussion for a different thread.

I had a pretty sizeable 457 when I left policing back in 2000.

I was sent a check after no longer participating in a 457 Plan nor was I taxed at 24% like a previous poster mentioned.

I was thirty-three at the time and owned a side business. My accountant had me pay like 7% as I put everything into my business.

Good luck!