Good idea to take out a loan against my 401k

[minendo]

Is it a good idea to take a loan out against my 401k to make a down payment for a house? As I understand it, the interest I pay back is being paid back to myself. True?

 

[her209]

That's what I'm told by my 401K.

 

[Stark]

401k.com

But withdrawing money from your retirement account should be considered an option of the very last resort. Here's why:

There are some plans which allow you to withdraw money for any reason, though they are rare. Generally, most plans require that you use the money only for a financial hardship. We all face hardships of varying degrees every day, but those which qualify for a 401(k) withdrawal are usually very limited. Many employers do not want to set up plans that require them to decide on a case-by-case basis who can withdraw money and who can't. So they use the safe harbor guidelines set forth by the Internal Revenue Service. According to the guidelines, the withdrawal must be due to an immediate and heavy financial need and the withdrawal must be necessary to satisfy that need.

 

[minendo]

Originally posted by: Stark
401k.com

But withdrawing money from your retirement account should be considered an option of the very last resort. Here's why:

There are some plans which allow you to withdraw money for any reason, though they are rare. Generally, most plans require that you use the money only for a financial hardship. We all face hardships of varying degrees every day, but those which qualify for a 401(k) withdrawal are usually very limited. Many employers do not want to set up plans that require them to decide on a case-by-case basis who can withdraw money and who can't. So they use the safe harbor guidelines set forth by the Internal Revenue Service. According to the guidelines, the withdrawal must be due to an immediate and heavy financial need and the withdrawal must be necessary to satisfy that need.

It's not a withdrawal. It's a loan against my 401k.

 

[her209]

I found this article... I hope it helps.

click

 

[bsobel]

Originally posted by: minendo
Is it a good idea to take a loan out against my 401k to make a down payment for a house? As I understand it, the interest I pay back is being paid back to myself. True?

That aritcle is a good link, I've always thought it was a bad idea (while your paying interest to yourself, your losing the gain you would have made in the market). Unless you have no other way of making this work....

 

[LordSnailz]

I still don't see any major cons with borrowing money from your 401k to get a house? Yes you lose the interest you might gain from your 401k and also the interest from your savings when paying back your loan. But you are getting a house ... am I missing something here?

 

[kranky]

Another factor is that if you leave your job for some reason, you have to repay the loan at once or else the loan becomes a premature distribution and you have to pay the taxes and extra penalties.

For most people, it would be bad enough to have just bought a house and find themselves out of work - without looking at a huge tax bill on top of it. Since the home was recently purchased, very few people could get a home equity loan to cover the tax bill.

That would scare me to death.

 

[bsobel]

Originally posted by: LordSnailz
I still don't see any major cons with borrowing money from your 401k to get a house? Yes you lose the interest you might gain from your 401k and also the interest from your savings when paying back your loan. But you are getting a house ... am I missing something here?

Sure, if the choice is to not get the house or to get it. But, for example, if your taking a 401k loan so you can take a smaller mortgage loan (or even avoid PMI), it's usually not a good decision.

Bill

 

[snoopdoug1]

Originally posted by: LordSnailz
I still don't see any major cons with borrowing money from your 401k to get a house? Yes you lose the interest you might gain from your 401k and also the interest from your savings when paying back your loan. But you are getting a house ... am I missing something here?

Generally, the money in a 401k can be assumed to make ~8% a year(someone correct me if I'm wrong). However, the loan you would take would be like 4-6%. Therefore, it's a better idea to leave the money you have in your 401k because it'll be earning 8%, and the loan will have 4-6%... so essentially you're gaining 2-4%.

 

[Queasy]

It's better to go out and get a traditional loan than to take a loan out on your 401k. You're paying interest on money that should be earning interest.

 

[Hammer]

i think if you're paying it back, you lose the matching from your employer. so don't forget to consider that.

 

[Dulanic]

Originally posted by: Doug3737

Originally posted by: LordSnailz
I still don't see any major cons with borrowing money from your 401k to get a house? Yes you lose the interest you might gain from your 401k and also the interest from your savings when paying back your loan. But you are getting a house ... am I missing something here?

Generally, the money in a 401k can be assumed to make ~8% a year(someone correct me if I'm wrong). However, the loan you would take would be like 4-6%. Therefore, it's a better idea to leave the money you have in your 401k because it'll be earning 8%, and the loan will have 4-6%... so essentially you're gaining 2-4%.

Really your losing all the intrest, sure your paying intrest on it and it's going back to yourself, but that intrest your paying is going back in with after tax money, vs before tax money you do with your normal contributions, plus that 8% for example isnt coming from you, its the account making the money, so your not making 4% or 6% or whatever, your just investing more of your money, but gaining less.

My 401K will never be touched it will stay in there till I retire. I do not have the best money managment skills, this is my one retirement source. If I never get the money, Ill never miss it, or spend it.

 

[Pantoot]

If something were to happen and you were to lose your job the loan you took against your 401k would be due in full.