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Posted: 1/17/2006 8:30:01 PM EDT
Does anyone have information on barrowing from a 401k to use toward the down payment on a house?
Just been reading a little about it. Seems to make since to take a loan out on myself as apposed to paying a bank intrest.
Any thoughts?
Link Posted: 1/18/2006 9:36:19 AM EDT
Talk to your plan administrator about borrowing from the plan. He/she will have all the details you need such as how much you can borrow (if it's even allowed by your plan), what interest rate you'll have to pay and what the repayment terms are.
Link Posted: 1/18/2006 9:43:53 AM EDT
My work has me attached to the payroll department in some functions so...

You lose out a little since your money is not getting you "profits" while you have it out. However, most 401(k) plans make you pay yourself back at some rate a little higher than prime.

I think my 401(k) plan was recently loaning the money out at 8.75% over 5 years. You could take out up to 1/2 of your contributions to date.

If you think the returns on your money will be below what the provider is charging in interest to you, it really works out to forced savings. If you think the returns will be higher than what the provider charges you, then you are clearly losing both time AND money.

Link Posted: 1/18/2006 10:23:26 AM EDT
borrowing from a 401K is always a bad idea IMHO. For starters you're mucking with your retirement money. Secondly, if you dont pay it back you get hit with taxes and penalty on it plus you screwed up your retirement. Thirdly you're paying it back with taxed money which when you take it out it'll be taxed again for a total of 2 times. Save up on the side for a house downpayment
Link Posted: 1/18/2006 10:41:09 AM EDT

Originally Posted By AssaultRifler:
borrowing from a 401K is always a bad idea IMHO.



It depends really...


For starters you're mucking with your retirement money.


I agree that 401k funds should be a last resort, but there can be some advantages to a loan from your 401k plan.


Secondly, if you dont pay it back you get hit with taxes and penalty on it plus you screwed up your retirement.


That is not a 401k loan, what you are talking about is a withdrawl.


Thirdly you're paying it back with taxed money which when you take it out it'll be taxed again for a total of 2 times. Save up on the side for a house downpayment


This may be true in some 401k plans, but not all. I know for a fact, again I am tied into payroll at my company, that the biweekly payments are pre-tax, just like a normal 401k contribution would be, except the contribution goes towards "paying yourself back" -- the paying yourself back actually buys shares of the mutual funds in the plan.

Also, my 401k provider only allows one loan open at a time. It does not allow withdrawls, unless you have an IRS allowed hardship.

Many company 401k's are similar...

Again, if you run ALL the numbers, the 401k loan may be the smartest way to acquire money. Though each scenario is different.

YMMV, worth exactly what you paid for it......
Link Posted: 1/18/2006 11:01:46 AM EDT

Originally Posted By SHIVAN:

Originally Posted By AssaultRifler:
borrowing from a 401K is always a bad idea IMHO.



It depends really...


For starters you're mucking with your retirement money.


I agree that 401k funds should be a last resort, but there can be some advantages to a loan from your 401k plan.


Secondly, if you dont pay it back you get hit with taxes and penalty on it plus you screwed up your retirement.


That is not a 401k loan, what you are talking about is a withdrawl.


Thirdly you're paying it back with taxed money which when you take it out it'll be taxed again for a total of 2 times. Save up on the side for a house downpayment


This may be true in some 401k plans, but not all. I know for a fact, again I am tied into payroll at my company, that the biweekly payments are pre-tax, just like a normal 401k contribution would be, except the contribution goes towards "paying yourself back" -- the paying yourself back actually buys shares of the mutual funds in the plan.

Also, my 401k provider only allows one loan open at a time. It does not allow withdrawls, unless you have an IRS allowed hardship.

Many company 401k's are similar...

Again, if you run ALL the numbers, the 401k loan may be the smartest way to acquire money. Though each scenario is different.

YMMV, worth exactly what you paid for it......




Here's the cons of a 401K loan I based my statements on from http://moneycentral.msn.com/articles/retire/basics/4714.asp

The cons:

1. About that credit check: Of course there isn't one. You're not borrowing anything. You're spending your own money.
2. You're losing interest. The net effect is that you have less money to invest and to earn interest. The money you borrow -- or take out -- of your retirement plan no longer appreciates in value from interest, dividends and/or capital gains in conjunction with the rest of your investment portfolio. Remember that you aren't really borrowing. All you are doing is using money from one account, such as your checking or savings account, to repay the money you borrowed from your 401(k). And when you take money out of that checking or savings account, that money loses interest, too.
3. It's not tax-sheltered money anymore. Whether you repay the 401(k) loan out of your salary or from a bank account, those payments are all made back into the 401(k) with after-tax dollars. So, let's say your monthly interest payment is $300 and you're in the 28% tax bracket. You'll have to make $416 in gross earnings to make the $300 payment. Then, when you retire and take withdrawals, you pay taxes yet again.
4. Unless you repay the loan, it is considered a premature distribution. You would owe federal and state income taxes as well as that 10% penalty if you are under age 59 1/2.
5. The loan isn't tax deductible. It's considered a consumer loan, so there is no tax advantage.
6. It affects your psychology toward retirement saving. If possible, your retirement money should sit untouched until you retire. It's too easy to get in the habit of dipping into your 401(k) instead of saving for things you need along the way. Keep your 401(k) in a loan free zone.
Link Posted: 1/18/2006 11:13:44 AM EDT
[Last Edit: 1/18/2006 11:34:40 AM EDT by SHIVAN]

Originally Posted By AssaultRifler:

<<snip>>



I'm gonna tone back my response....

1) A 401(k) loan MAY represent a better choice IF you run the numbers and compare it to personal loans from other sources.

2) Messing with your 401(k) funds should be a last resort.

3) Do NOT make a 401(k) withdrawl, as you will lose about at least 10% in pure penalty and another 20% or more in taxes.
Link Posted: 1/18/2006 12:00:01 PM EDT
Plus you lose all the compounding. While that money is out being repaid it's not compounding (tax free). makes a HUGE difference at the end of 30 years.

save the money, don't steal from your 401k or IRA.

Brian
Link Posted: 1/18/2006 1:36:17 PM EDT

Originally Posted By BozemanMT:
Plus you lose all the compounding.



Maybe....

This always assumes a net gain over the term of the "loan".

What if the funds you have are all LOSERS are the 2-5 year period of repayment??

I know it means you bought low, and will eventually sell high...but again there are lots of variables that could be different for each person.
Link Posted: 1/19/2006 10:19:34 AM EDT

Originally Posted By SHIVAN:

Originally Posted By AssaultRifler:

<<snip>>



I'm gonna tone back my response....

1) A 401(k) loan MAY represent a better choice IF you run the numbers and compare it to personal loans from other sources.

2) Messing with your 401(k) funds should be a last resort.

3) Do NOT make a 401(k) withdrawl, as you will lose about at least 10% in pure penalty and another 20% or more in taxes.



___

Best answer! Money in a 401-k should never be treated as a savings account, but for retirement purposes only. A house purchased with 401-k dollars will be the most expensive home you'll ever own!!
Link Posted: 1/27/2006 4:41:24 AM EDT
[Last Edit: 1/27/2006 4:43:34 AM EDT by smlockeiii]

Originally Posted By AssaultRifler:
borrowing from a 401K is always a bad idea IMHO. For starters you're mucking with your retirement money. Secondly, if you dont pay it back you get hit with taxes and penalty on it plus you screwed up your retirement. Thirdly you're paying it back with taxed money which when you take it out it'll be taxed again for a total of 2 times. Save up on the side for a house downpayment



+1 What he said


eta: You might be able to take out the loan and then pay it back faster through additional payments. but you are still going to have money taxed twice. Good for "emergecies" but try to plan for them.
Link Posted: 1/27/2006 7:24:18 AM EDT
I did some research doesn't sound as good to me when I first came up with the idea. I'll be making my last truck payment in about 2 weeks then I can start to really save some money. Maybe in a year or so I'll have enough for it.

Thanks for all the input guys!
Link Posted: 1/29/2006 1:45:43 AM EDT
401k loans are what you want, NOT a withdrawl.
401k loans are paid back with pre-tax dollars I'm pretty sure.

Otherwise, I think 401k loans are absolutely off limits EXCEPT for other investments. What no one else has thought of is your not taking a loan out to buy a fancy car or new gun. In the big net scheme of things your not so much taking a loan out as simply shifting investment vehicles.
Think of it as moving money in your 401K from investment A to investment B. Except in this case your moving it from investment A (401K) to investment B (home).

In that case, I say go for it. While its important to plan for retirement and stay on track with it, I also dont think you'll find anyone who says buying a house is a bad move unless you get something in a hot market which may lose value if the bubble pops.
Link Posted: 1/29/2006 2:08:40 AM EDT
[Last Edit: 1/29/2006 2:15:21 AM EDT by soowah]
Some allow you to roll a portion over to an IRA, IIRC. If you do that you can keep a decent return rate(depeding what rate you get, usually much less than prime ~ 1 - 1.5%) and borrow against a secured loan.

You do get screwed, like others said by paying yourself (the loan) back with taxed money. It really boils down to what kind of investments you have and are you willing to take away from their earning potential.

But sometimes I find it necessary to borrow against mine.

Edit, I think I'm talking out my ass on the 1-1.5% I believe it's in the 3% range, it's been several years since I've done it.

Edit#2, putting into a house would be a wise investment, ESPECIALLY if you don't own one now.
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