457(b) to Roth IRA conversion for investment property purchase... questions

[roastbeef]

i've done a bit of reading online and some things still aren't clear, and since there are some financial savvy people on here, i figured i would ask since someone may have experience in this.

i have a 457(b) plan and i'm looking to convert $10k of it ($10k is the one time limit) to a roth IRA only to use for a down payment for an investment property.
i've read that its for a "first time home purchase", but i've also read that what the government rules define as a "first time" is pretty loose. this would be my first time doing this if i can.

the 457(b) is pre tax, and the roth IRA is post tax. has anyone done this, and is there a basic tax equation for it?
also, this would be my second strictly investment property, not my first, but does this qualify since its my "first time" using my roth IRA for this?

my goal is to convert my 457b to a roth ira and using it for part of a down payment while paying minimal taxes.
i know this isn't ideal, but i found a property i want to jump on, and i don't quite have enough to make a serious offer.

thanks!

[gatorfast]

Going from a pretax account to a Roth account means you will incur taxes on any amounts you take out. If you were going to keep the funds in a Roth Ira I would say this is smart assuming you are young as the funds will grow tax free. However, since you plan to use the funds to purchase a home (btw I don't think you will be able to use this for investment property, I would do more research on this if I were you) that would be foolish as you will be paying thousands in taxes in the current year while reaping no benefit as you won't be taking advantage of the tax free growth.

You need to re-think this plan. Messing with your retirement accounts to fund some real estate deal you don't have the cash for isn't very smart. Be patient and save some more. I promise there will be other deals.

[roastbeef]

i would hate to pay taxes for the conversion, and then pay taxes on the $10k as income. something like that would definitely kill the deal.
i'm 25, so i have a lot of time to let these things grow.

i'm no expert, but the 457b has just been "ok." i've only had it for about four years, but i'm not that impressed with it. i picked up my first investment property this year, and i've been thrilled with that.
i might just need to slow down and recognize that the 457b is long term, and i'm getting excited about the instant gratification of getting another rental property. i almost feel like another rental is going to bring a better return right away, as well as a long term return, but maybe i'm just looking at it a little skewed.

[silvergray545]

The minute you withdraw funds from your 457(b), you'll have to pay taxes on it. It doesn't matter what you do or plan to do with the money. Unless you absolutely need the money from your 457(b), I wouldn't touch it until you are ready to retire.

[gatorfast]

Originally Posted by roastbeef

i would hate to pay taxes for the conversion, and then pay taxes on the $10k as income. something like that would definitely kill the deal.
i'm 25, so i have a lot of time to let these things grow.

i'm no expert, but the 457b has just been "ok." i've only had it for about four years, but i'm not that impressed with it. i picked up my first investment property this year, and i've been thrilled with that.
i might just need to slow down and recognize that the 457b is long term, and i'm getting excited about the instant gratification of getting another rental property. i almost feel like another rental is going to bring a better return right away, as well as a long term return, but maybe i'm just looking at it a little skewed.

You would pay taxes on the conversion but not on the $10k from the Roth post conversion (as that is already post tax income). But like I said, you will be paying a "penalty" (i.e. tax) on your funds when you withdraw from the 457b with no future benefit. So if the tax rate is 20% for example, you would need to withdraw $12,500 in order to net you $10k.

You are right when you said you need to slow down and realize that your retirement accounts are long-term. Its not a get rich quick thing but rather a build over time thing.

[roastbeef]

right, thats another thing i'm working on; trying to look at investments as a whole and look at the big picture.

i'm a little bit in a rush to acquire property with the mindset that property and interest rates are going to rise.
i guess i sort of built up the mindset that property will provide a short term return (instant income over mortgage) and appreciation of the property its self (equity through appreciation).
i would still be planning on continuing with the 457b and possibly contributing even more since i used some of it.

i'm just not sure. if i'm going to pay ridiculous taxes on it, and pay taxes on the $10k in the bracket i'm in, its not going to be worth it... its almost like trading $5k to get a hold on $10k. obviously not worth it.

[goalieman24]

Lets clear things up.
There's no reason to convert any of it to a Roth. Your initial thinking was right about converting and then taking the exemption. 2 issues: First, you wouldn't be able to get that exemption if you've owned(let alone purchased) another property within the year. Second, issue #1 is really a non-issue anyway. The whole point of converting and then taking the exemption would be to avoid the early withdrawal penalty. However, a 457 is a bit different than a 401k/403b in that there is no early penalty for withdrawals before 59 1/2. So if you really wanted the money, just taking it straight from the 457 would be fine... but you'll still be taxed on it of course.

With that aside, it's not really the best idea as others have already said.

[roastbeef]

i found that there was a grey area or loop hole in the law's loose definition of "first time" property ownership, but i could see that as being an issue.
its shaping up to be a lot more complicated that i hoped when i started kicking the idea around, and costing me a significant amount for not that much money.

thanks for the discussion folks.