Taking a loan against a 401k...

[Cuda1447]

Need a bit of insight from some of the finance guys. I've done a bit of research but got mixed results and quite frankly I trust ATOT more.


I am thinking about taking a loan against my 401k. My parents inherited a house recently that is in need of some repairs to get it into condition to sell. The house is pretty nice on a great piece of property, it just wasn't maintained all that well over the last 5-7 years. It needs a new roof, some flooring repairs etc...


My parents have some of the cash to do the repairs, but not enough to cover all of it, along with taxes on the property etc... and we don't think it'll sell in its current condition. A few people who have looked at it liked the property but didn't want to put the effort into the repairs. They were most likely older people, as its a perfect retirement home in Michigan.


That said, I am looking at taking out a loan against my 401k as a means of getting quick/easy cash and then repaying it when we sell the house... we are thinking hopefully by spring/summer at the latest. I will be making some money off of selling the house, probably doubling whatever I take out against my 401k to contribute to repairs, but I want to make sure I'm not missing something major.

I have roughly 15-20k in my 401k (haven't looked in quite awhile) and I am no longer with the employer the 401k was through. It was managed by TRowe Price and is still sitting with them. I am under the impression I can only take a percentage out and I will pay an interest rate of prime plus a percentage point or two. I will also have to immediately start making payments on it.


Are there any other major things I need to be aware of or consider?

 

[rcpratt]

A few things: you can only borrow up to 50% of your balance. Second, your payments are made in after-tax dollars, instead of normal tax sheltered contributions (meaning your interest payments will be taxed twice...but not the principal).

The biggest risk, though, is what will happen with the market in the next ~6 months, especially with where the market is right now (or not, depending on your opinions on where it's going, I guess).

 

[JulesMaximus]

Call TRowe Price.

From what I've experienced it is typically your employer who would loan you the money and you pay it back through payroll deductions.

 

[Ns1]

Call TRowe Price.

From what I've experienced it is typically your employer who would loan you the money and you pay it back through payroll deductions.

I took out a 401k loan.

Fidelity sent me a check, not the company. The loan is noted on my Fidelity account, and the deduction noted on my W2. I don't see where my company would get involved otherwise.

 

[Drekce]

While borrowing from a 401k is something you should avoid, you just have to think about it as less money you would have put into retirement, and instead cash you saved after taxes. That takes away the argument that paying it back in after tax dollars is an additional hit.

 

[JulesMaximus]

I took out a 401k loan.

Fidelity sent me a check, not the company. The loan is noted on my Fidelity account, and the deduction noted on my W2. I don't see where my company would get involved otherwise.

With my old company it was an agreement between the employee and the company that held the 401k IIRC. The repayments were scheduled and deducted from your bi-weekly payroll as an after tax deduction. If you were terminated, you had to pay back the entire loan amount or it would show as an early withdrawal.

Since his 401k is with an ex-employer he will need to call TRowe Price to find out how they handle these things.

 

[KK]

I took a loan out from my 401k 2 years ago. I think the max we could pull out was 50k as that's what we pulled out. If you use it for a purchase of a home you can extended the length of payments out to 10 years. I got to pay it back plus interest which the interest does also get put back into my 401k. There is a small service fee monthly, something like 2 dollars. With the markets as they are, I don't think it's hurt my overall earnings that much as the markets pretty much been stagnant over that time. There was something about if I was no longer employed that I would owe the balance back into the 401k all at once, I don't think it allowed to still be paid back monthly.

 

[nickbits]

NEVER take out a 401k loan
/Suze Orman

 

[gorcorps]

I looked into it not too long ago, and the negatives far outweighed the positives for my situation. Yours might be different, but from what I remember:

-You are limited to a certain percentage you can take a loan out of. This is generally 50%, but that's not a rule and can vary by employer. What doesn't vary is that it's 50% of what YOU'VE paid into it... you can't take out a loan on the matching portion.

-rates aren't great, but that will also vary

-You can not contribute to your 401k while you have a loan on that 401k. Not a big deal since you're not working for them anymore, but something I did not know.

 

[Drekce]

I looked into it not too long ago, and the negatives far outweighed the positives for my situation. Yours might be different, but from what I remember:

-You are limited to a certain percentage you can take a loan out of. This is generally 50%, but that's not a rule and can vary by employer. What doesn't vary is that it's 50% of what YOU'VE paid into it... you can't take out a loan on the matching portion.

-rates aren't great, but that will also vary

-You can not contribute to your 401k while you have a loan on that 401k. Not a big deal since you're not working for them anymore, but something I did not know.

First off, you certainly can invest while simultaneously repaying a loan. The investment part is tax deferred and the loan payment is not.

Second, the rates for my 401k are extremely cheap. I think it was 1.5% last time i read a blurb about it in a statement. Also, you are paying that interest to yourself, so its not like a regular loan where you pay a bank.

The biggest drawback is that if the investments increase in value while you have the loan, you would miss out on those increases for the loaned amount. I dont really think the market is going to increase significantly in the near future.

On the flip side, if the market drops you actually increase your holdings.


Btw, does Tapatalk always put <br>tags in replies?

 

[Adrenaline]

I looked into it not too long ago, and the negatives far outweighed the positives for my situation. Yours might be different, but from what I remember:

-You are limited to a certain percentage you can take a loan out of. This is generally 50%, but that's not a rule and can vary by employer. What doesn't vary is that it's 50% of what YOU'VE paid into it... you can't take out a loan on the matching portion.

-rates aren't great, but that will also vary

-You can not contribute to your 401k while you have a loan on that 401k. Not a big deal since you're not working for them anymore, but something I did not know.

In my plan I was vested and able to borrow against the full amount.

My interest rate was fantastic. It really doesn't matter if it is cheap as it goes into your 401k.

I was able to contribute with a loan out. Each plan is different.

I took a lown out right after stocks started to dive. I am so far ahead on that deal it is ridiculous. My loan is almost paid off now. When the stocks I am invested in hit a certain number I am jumping on another loan. I missed out on the chance a few weeks ago. Come on stock go up just a few dollars!!!!

 

[KK]

I looked into it not too long ago, and the negatives far outweighed the positives for my situation. Yours might be different, but from what I remember:

-You are limited to a certain percentage you can take a loan out of. This is generally 50&#37;, but that's not a rule and can vary by employer. What doesn't vary is that it's 50% of what YOU'VE paid into it... you can't take out a loan on the matching portion.

-rates aren't great, but that will also vary

-You can not contribute to your 401k while you have a loan on that 401k. Not a big deal since you're not working for them anymore, but something I did not know.

In addition to what drekce mentioned, my amount was 50% of the total value of the 401k, not what I've paid into it. I was hovering right at 100k when I did the loan, was kinda worried that the markets would go down and leave me alittle short. If yours had all those limitations then yeah, I can see the down side. Luckily mine seem to mirror Drekce's post.

 

[Fern]

-snip-
I have roughly 15-20k in my 401k (haven't looked in quite awhile) and I am no longer with the employer the 401k was through. It was managed by TRowe Price and is still sitting with them. I am under the impression I can only take a percentage out and I will pay an interest rate of prime plus a percentage point or two. I will also have to immediately start making payments on it.


Are there any other major things I need to be aware of or consider?

Are you sure it's still in a 401(k)?

I'm not sure you can still be in the 401(k) if you're no longer employed by them. In any case most employers won't permit it and upon termination your 401k funds are transfered to an IRA.

Important to check because you aren't allowed to borrow any money if it is an IRA.

Fern

 

[rcpratt]

You can still have a 401k if you're not with the company. Some companies require you to roll it over to a new 401k, but some don't.

 

[Cuda1447]

Are you sure it's still in a 401(k)?

I'm not sure you can still be in the 401(k) if you're no longer employed by them. In any case most employers won't permit it and upon termination your 401k funds are transfered to an IRA.

Important to check because you aren't allowed to borrow any money if it is an IRA.

Fern

I'm positive it's still a 401k. I haven't rolled it into a ROTH IRA or anything.

 

[gorcorps]

First off, you certainly can invest while simultaneously repaying a loan. The investment part is tax deferred and the loan payment is not.

Second, the rates for my 401k are extremely cheap. I think it was 1.5% last time i read a blurb about it in a statement. Also, you are paying that interest to yourself, so its not like a regular loan where you pay a bank.

The biggest drawback is that if the investments increase in value while you have the loan, you would miss out on those increases for the loaned amount. I dont really think the market is going to increase significantly in the near future.

On the flip side, if the market drops you actually increase your holdings.


Btw, does Tapatalk always put <br>tags in replies?

In my plan I was vested and able to borrow against the full amount.

My interest rate was fantastic. It really doesn't matter if it is cheap as it goes into your 401k.

I was able to contribute with a loan out. Each plan is different.

I took a lown out right after stocks started to dive. I am so far ahead on that deal it is ridiculous. My loan is almost paid off now. When the stocks I am invested in hit a certain number I am jumping on another loan. I missed out on the chance a few weeks ago. Come on stock go up just a few dollars!!!!

In addition to what drekce mentioned, my amount was 50% of the total value of the 401k, not what I've paid into it. I was hovering right at 100k when I did the loan, was kinda worried that the markets would go down and leave me alittle short. If yours had all those limitations then yeah, I can see the down side. Luckily mine seem to mirror Drekce's post.

Huh... everybody I talked to pushed on me pretty heavily those specific negatives. Maybe I was being fed some BS though, it's definitely possible.

 

[vi edit]

Huh... everybody I talked to pushed on me pretty heavily those specific negatives. Maybe I was being fed some BS though, it's definitely possible.

Many people instantly hear "taking money away from retirement" and instantly go into "BAD BAD BAD!!!!" mode. Real answer is that it's situation dependent. If you need money for an emergency it's better than taking an unsecured loan from a bank or burying yourself in credit card debt. If the markets are flat or actually dropping then you aren't losing anything(or very little). The interest paid goes back to you and there may or may not be a processing fee depending on your plan.

 

[kranky]

It's very, very unlikely you can borrow against your 401k if you are no longer working there.

Why not get a home equity loan on the house? At least that would be tax-deductible.

 

[Cuda1447]

It's very, very unlikely you can borrow against your 401k if you are no longer working there.

Why not get a home equity loan on the house? At least that would be tax-deductible.

It's not my house, it's in my parents name. It also is not their primary residence so they cannot get a HELOC on it. They would have to establish residency in a different state to do so.

 

[rcpratt]

I guess it would be prudent to first figure out if you can take out the 401k loan, what rate you'll get, and how much you can borrow. I know with JPM it's pretty easy to find out quickly online, not sure about TRP.

 

[spidey07]

Seek professional help. There are very few good reasons to do what you're asking. They are there, but very few.

 

[Rage187]

I've taken two 401k loans over the last 5 years. First time was for a down payment on a house. Paid it back in two years through payroll deduction. Took another one out for medical bills a couple years ago and have one more year to pay.

Super easy through ML. Go on website and choose the amount and length of the loan and the next week you get a check.

 

[Hugo Drax]

Bad idea, and you will not get the cost of repairs on a dollar per dollar basis. If the house is paid for, why not lower the price to a point where it sells and call it a day.

Either you sell it for less than you want to get for it. or spend money on fixing it but when you sell you might only get 20 cents on the dollar on the repair expenditures.

Better to dump it and take the money now.

 

[Cuda1447]

Hugo, I'm not sure where you are going with this?


If I take a loan against my 401k and I repay the interest to myself and we raise the price of the house by more than we put into it in repairs, how will I lose money? As for lowering the price, it's not the price that's a problem we don't think. It is a house primarily looked at by older people as a retirement home. As such, it isn't the price that is an issue, but rather doing the repairs needed to get it into good condition again. They simply don't want the hassle.

 

[Phynaz]

Home equity loan - which is essentially a mortgage. It gets paid out of the proceeds of the home sale. I have no idea why anybody would consider anything else.