Need Advice! Should I borrow funds from my Annuity & 401(k)??

alisajp · #1 (**permalink**) 05-08-2009, 07:17 PM

Good day! I am need of approximately $50,000 to cover back taxes and attorney fees on a property I recently inherited.

My current financial situation:
- I own a condo. I purchased it for $125,000 and I could sell it now for about $145,000. I owe $116,000 on the mortgage.
- I have $36k invested in aggressive growth mutual funds.
- I have a 403(b) with $50,000 but I cannot withdraw or borrow from it. I can only annuitize it.
- I have an after tax annuity with a current value of $100,000 but a 15% penalty for taking an early withdrawal. I can take 10% without penalty right now. The after-tax dollar amount invested in the annuity was $90,000. I can take a loan of 45 or 50% of the annuity value and does not have any time limit of paying it back.
- I have a 401k with $21,000 and I am able to take a loan for about $10,000 at 6.7% interest rate which must be paid back in 5 years.
- I have a USAA credit card with a $20,000 limit and a 6% APR.
- I just inherited commercial property appraised at over $800,000 last year and it is fully paid off. I just opened an LLC to put the property into.

I am currently unemployed and haven't worked for the last 2 years so when I went to a bank to obtain a loan they stated because of new laws they could not offer any type of loan to me even though my credit score is over 800. I would have to provide W2 statements for the past two years which I do not have.

I currently have no outstanding debt except for my condo. The property I inherited is expected to bring in rental income and when I deduct insurance, taxes, property mgr fees, etc. I will hopefully make $15,000-$20,000 a year on it.

So what I was going to do is use my credit card with 6% APR to pay off the back taxes (over $17,000) and then take maximum loans on my annuity and 401k to pay the attorney fees and other fees. I do not want to have to get a loan from a private lender at over 10% interest rate. Another option I was thinking of was to sell my condo although this could take some time.

So I am curious as to any financial experts opinions of my situation and if you can you think of a different way(s) to get the money to pay off the attorney fees and taxes?

I sincerely thank you in advance for taking the time to read my post and to reply to it. I am not a finance person and am really confused as to what to do!!

Money-411 · #2 (**permalink**) 05-08-2009, 09:46 PM

The taxes have to be your priority. Have you done some due diligence to make sure there isn't a tax sale pending or anything like that? I have run into a problem before where a client inherited property right before the tax sale, the statutory notice went to the now deceased relative, and the property was sold right out from under my client without him knowing it.

Assuming you have a little bit of time, I would try again to get a loan against the inherited property. Use the rental income to try to qualify for the loan. If you don't have the place rented yet, see if you can do that quickly. If there is sufficient equity in the property, and the property is producing income, $17,000 is not that big a loan. If you cannot get a bank loan, is there anybody in your family who can lend you the money? Is there furniture or personal property that is part of the estate and can be sold to raise funds? The idea of taking out $17,000 on your credit card makes me shudder. Even though you are currently at 6%, your credit card company (or companies) might interpret a large cash advance to mean that you are no longer a safe credit risk. When that happens, they jack up your interest rate, and suddenly you might find yourself paying 21.9% or even more.

I'm also not a fan of borrowing from your 401(k) unless you absolutely have to. One problem with borrowing from your 401(k) is that you are taking out pre-tax dollars, and you will be repaying the loan with after tax dollars (which will be taxed again when you withdraw the money at retirement). If you just take the money out, then you have to pay a penalty plus the tax rate. In other words, if you had to sit down and calculate a percentage rate that you are paying for the use of that money, it would probably be higher than what you would pay on a conventional loan. Even if the loan was at 10% as you mentioned, you will still be better off with the loan than taking money out of your 401(k). If all else fails, I would probably recommend that you look into some kind of personal loan before you take a large cash advance on your credit card or borrow from you 401(k).

Now on to the attorneys' fees. I find myself wondering how they were incurred and whether they constitute a lien against the property or are just an unsecured debt. Are the fees related to the estate or were they yours? Do the attorneys have to be paid before the estate is closed and the real property transferred to you? The reason I'm asking is because attorneys typically do not want to sue clients for unpaid collections. For that reason, they are often willing to work with you to set up a payment plan for outstanding fees. This would be a much better option than coming up with a lump sum, and I would highly recommend you take a stab at it if you can. I just don't know if there is some statutory reason they need to be paid all at once (don't know Colorado law). If the attorney has advanced costs on your behalf, you will need to find a way to pay those off as quickly as you can, but you might have some flexibility with the fees.

I hope this helps, and I wish you the best of luck in getting this resolved to your satisfaction.

alisajp · #3 (**permalink**) 05-09-2009, 05:07 PM

Thank you so much for taking the time to read and respond to my post Money-411! I greatly appreciate it. I have just been so confused and don't know who to ask for guidance! I really value your comments and will try to come up with another way to get funds other than maxing out my credit card....you're right that would not look good for my credit purposes!

The one advantage of taking a loan from my after-tax annuity (not the 401k) is that there is no mandatory payments I have to make back into it right away, which works out well for me because it will probably take me a few years to be able to start paying off debt. Right now I need to come up with more funds for repairs, insurance, etc. on the new property. I don't know enough about loans to know if you can take a loan and not make payments on it for a certain period of time...

I will talk to my attorney (in FLA) and see if he can't offer a payment plan. But yes, he needs to be paid in full in order for the property to be transferred to me and the Estate closed.

Thank you again for your helpful information.

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