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Tapping retirement funds to invest in real estate is a terrible idea. For Baltimore’s top lawyer, it led to federal charges.

State’s Attorney Marilyn J. Mosby withdrew retirement money to invest in Florida rental property. Financial experts say that’s not smart.

Baltimore City State’s Attorney Marilyn J. Mosby at a Jan. 14 news conference. (Michael Robinson Chavez/The Washington Post)
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Even if Baltimore State’s Attorney Marilyn J. Mosby isn’t guilty of the charges brought against her, she is certainly guilty of making a monumentally bad financial move.

Mosby (D) has been indicted by a federal grand jury on two counts each of perjury and making false loan applications. The indictment stems from her claim that she experienced “adverse financial consequences” and thus was entitled to withdraw money from her City of Baltimore retirement fund under a pandemic-related provision intended to help struggling Americans. Federal prosecutors allege she lied about suffering a coronavirus-related financial hardship, which would have allowed her to avoid paying a 10 percent early-withdrawal penalty from her retirement account.

The 41-year-old prosecutor has denied the charges, even going before a church congregation Sunday asking for their prayers.

“Without equivocation, I am innocent on the charges levied against me,” Mosby told churchgoers. “I have done nothing wrong.”

Mosby denies criminal charges in federal probe of her finances, claims retaliation

When asked about her use of the retirement money, Mosby attorney A. Scott Bolden said in an interview: “We probably wouldn’t comment on that. That kind of gets to the heart of our case.”

According to the indictment, Mosby withdrew money from her 457(b) retirement account, once for $40,000 and another time for $50,000, to use for the down payments on vacation properties in Kissimmee and Longboat Key in Florida.

“A person should not use funds from their retirement plan to buy real estate,” said Ernest Burley, a certified financial planner and owner of Maryland-based Burley Insurance and Financial Services. “I always advise clients to save for any future purchase or project instead of tapping their retirement plan.”

Not a single financial professional I spoke with would advise their clients to pull out funds from their workplace retirement accounts to invest in real estate, even in a vacation haven such as Florida.

As Florida home prices spike, middle-class residents wonder if they can afford to stay

“Very often people get themselves into trouble financially because of their own poor judgment or bad behavior,” said Ric Edelman, host of “The Truth About Your Future,” a nationally syndicated radio program. “Retirement accounts are designed to provide you income in retirement. If you want to buy a boat or travel around the world or pay for college, you need to find those assets elsewhere.”

The current low-interest-rate environment and supercharged housing markets with property bidding wars are prompting people to make unwise financial decisions, said Carolyn McClanahan, a certified financial planner who founded the fee-only Life Planning Partners based in Jacksonville, Fla.

“I have a lot of experience with people doing these sorts of things in a crazy real estate market,” McClanahan said.

The repercussions of using retirement money for this type of investing are fivefold, Burley said:

Consider the tax bite. The money that is withdrawn has to be claimed as ordinary income, and the person has to pay income taxes on the withdrawal. “It’s not smart,” McClanahan said. “You’re paying this big income tax bill to invest in something after tax.”

The impact of a 10 percent early-withdrawal penalty. The indictment accuses Mosby of illegally taking advantage of a provision under the Coronavirus Aid, Relief and Economic Security (Cares) Act to avoid paying a 10 percent penalty for the early withdrawals.

Ordinarily, if you are younger than 59½, you are subject to a 10 percent early-withdrawal penalty on top of the income tax owed on your withdrawal. But under the Cares Act, if you experienced financial hardship related to the pandemic, the penalty was waived for withdrawing money from individual retirement accounts and defined contribution plans, such as a 401(k) or the similar 457(b) retirement account.

However, let’s say Mosby is proved innocent. Penalty-free does not mean tax-free. She still has to pay federal and state taxes on the money she took out of her retirement plan.

Here’s the bottom line on this point: When you add in the tax hit of withdrawing the money, including a possible 10 percent penalty, you’re severely overpaying for the property compared with someone who’s buying it without using retirement assets, Edelman said. “And that additional cost makes the financial transaction a very bad deal.”

You lose the advantage of having your money grow tax-deferred. For instance, let’s say you withdraw $50,000 from your retirement account. That money will no longer be in the retirement plan potentially earning gains for you.

Should I use my retirement fund to pay off debt? The Post’s personal finance columnist answers your questions.

Don’t discount the debt. If the retirement money is used to buy real estate but the person is taking on a mortgage, they are adding debt to their financial situation, Burley said. “I know people say a mortgage is good debt, but it is debt nonetheless,” he said. “So instead of having the money in the retirement plan, the person has added debt to their monthly financial picture.”

People often underestimate the cost of ownership. Even if the property is purchased in full, it costs money to own real estate — maintenance, insurance, repairs, upkeep, homeowner association fees, etc. Do you have extra funds to cover those expenses and the mortgage if you lose your rental income for any period of time?

I’m feeling a bit of deja vu. Just before the 2008 housing bust, people lost their minds trying to make it rich in real estate. And we know how that ended. It often ends badly for many people who try to borrow their way to wealth.

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