Connecticut State & Municipal Employees Can Borrow Against Retirement Accounts to Invest In Real Estate

If you’re a Connecticut state employee or an employee of a Municipality and want to invest in real estate but don’t think that you have the funds, I’ve got great news for you! If you have money in your Deferred Compensation 457 account, you may be able to use it toward your RE Investment. This is a great option but there are a few things that you must consider.

 

The Rules:

You can generally borrow up to 50% of your account balance or $50,000, whichever is less. You usually have up to five years to repay the loan, unless you are borrowing for the purchase or renovation of your primary residence, which allows a longer payback. Participants are permitted to take one or two loans at a time and a one-time set up fee may apply. Now, let’s go through the pros and cons of borrowing from your deferred compensation plan account.

Pros:
1. There is no credit check. You don’t have to apply for the loan, and you can make plans knowing that you will get the loan.

2. There is a reasonable interest rate. You pay the rate set by the plan; as of this post, CT state employees pay 5.55%.

3. It provides a reasonable return. Since you pay yourself the interest, it looks like a good deal.

4. The interest is tax-sheltered. You don’t have to pay taxes on the interest until retirement, when you take money out of the plan.

5. It’s convenient. You can apply online or make one quick phone call. Loan repayments (principal and interest), are generally payroll deducted on a biweekly basis.

Cons:

1. You pay more taxes. Since you repay the loan with after tax dollars the interest is double taxed, significantly increasing the cost of borrowing.

2. There may be consequences if you leave your job. If you leave your job the loan is due and payable or it will become taxable income in that year. (Any rolled over assets from non-governmental plans remain subject to the IRS 10% premature withdrawal penalty tax if withdrawals are taken prior to age 59 1⁄2.)

3. The loan isn’t tax deductible. Unlike a traditional mortgage, this is considered a consumer loan, so there is no tax advantage.

4. What are the consequences for defaulting on the loan? The borrower understands that if the loan is in default, the outstanding balance plus accrued interest (the “Defaulted Amount”) will be reported to the IRS for the year the default occurred. Interest will continue to accrue but will not be reported to the IRS until the loan is repaid or offset with a distribution. In the event of a loan default, the participant is not permitted to initiate another loan until the defaulted loan is repaid.

So as you see, there are a few things that you should consider before making this move. Everyone’s situation is different, but in general, I think that it's a great option when considering how to fund your next investment.

 

For more rules & regulations on investing in Real Estate with your 457 (Deferred Comp Plan) Contact me here!