Author Topic: Withdrawals of Roth IRA contributions  (Read 4717 times)

mtn

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Withdrawals of Roth IRA contributions
« on: June 28, 2016, 04:41:49 PM »
Looking at buying a house, and we're playing around with different down payment options. Depending on the specific house (and taxes associated) and the loan that we end up picking, we may be a few thousand short on our closing costs. I'll probably just end up "pawning" a guitar or two to my dad, but can someone tell me the ins and outs of borrowing form my Roth IRA?

Lets make it simple and assume that I have $7500 in it.
-2015 contributions: $5,500
-2016 contributions: $1,000
-Earnings: $1,000

I could withdraw without penalty or taxes $6,500. Is that correct? Can I put it back in at any time, not counting against my annual limit?

Or, another scenario (wife's), we have the following:
2015 contributions: $3000
2016: $0

Could we withdraw the $3,000, and then prior to April 2017 put in $8,500? or could we only put in the $5,500 and the 2015 contribution is just gone (other than the earnings that remain there)?

johnny847

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Re: Withdrawals of Roth IRA contributions
« Reply #1 on: June 28, 2016, 04:47:11 PM »
Yes you can withdraw 6500 without taxes or penalties, but you never get that contribution space back. In your example you could only contribute another 4500 for the year.

For your wife's Roth IRA, same thing, you don't get the contribution space back. So she can only contribute 5500 this year.

If you're a first time home buyer this applies http://www.rothira.com/blog/should-i-use-a-roth-to-buy-a-house
But you still don't get any contributiom space back from that method either

patrat

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Re: Withdrawals of Roth IRA contributions
« Reply #2 on: June 28, 2016, 05:20:03 PM »
Be careful when preparing your taxes. I had a hell of a time figuring out how to get the software (H&R) to recognize that I was withdrawing principal instead of earnings. The tax consequences of that slipping through are enormous.

Also, if the contribution is not properly "seasoned" some number of years, you are subject to a 10% penalty fee.

seattlecyclone

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Re: Withdrawals of Roth IRA contributions
« Reply #3 on: June 28, 2016, 05:38:39 PM »
Also, if the contribution is not properly "seasoned" some number of years, you are subject to a 10% penalty fee.

This is not true. A contribution can be withdrawn at any time without penalty.

There's also a "first time homebuyer" provision for Roth IRAs that would let you take out $10,000 (including earnings) with no penalty but only if you have had your IRA open for at least five years.

patrat

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Re: Withdrawals of Roth IRA contributions
« Reply #4 on: June 29, 2016, 09:15:39 AM »
there is an exception, and that is  when you have converted traditional retirement accounts to ROTH. You pay your tax at conversion, but additionally there is a 10% penalty if you withdraw  principal within a certain number of years.

frugaliknowit

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Re: Withdrawals of Roth IRA contributions
« Reply #5 on: June 29, 2016, 09:51:49 AM »
If you do this, you will likely regret it when you are older.

mtn

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Re: Withdrawals of Roth IRA contributions
« Reply #6 on: June 29, 2016, 10:04:21 AM »
If you do this, you will likely regret it when you are older.

Yes, just like I regretted not buying Apple in 2007 after my dad convinced me to stick with VTI, or how I regretted not buying a house a year out of college, or how I regretted selling my car...

Life is full of regrets. I don't regret any of them. In the long run buying a house will save me money over renting, in most scenarios that I play out. Drawing from the IRA might help or hurt that, but if I can replenish it I'll be ok. I have sort of a short term liquidity problem because I've put "too much" to tax advantaged retirement accounts and not enough to liquid accounts. I've basically been living paycheck to paycheck for the past 3 years. Should I regret that?

Choices

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Re: Withdrawals of Roth IRA contributions
« Reply #7 on: June 29, 2016, 10:41:21 AM »
If you're coming up short on your closing costs, how are the rest of your finances?

- Do you have any debt?
- What's the ratio of your mortgage/interest to your take-home pay?
- Do you have at least 20% down to avoid PMI?
- Have you considered a 15-yr mortgage for a lower interest rate?

Buying a smaller, less fancy house isn't as exciting now, but a lot of times it's a wise decision.

catccc

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Re: Withdrawals of Roth IRA contributions
« Reply #8 on: June 29, 2016, 11:03:40 AM »
I personally wouldn't buy a house if I didn't already have some additional cash laying around that would be available after the purchase.  Sometimes expensive things break in houses.  Unless you are just using your Roth to avoid raiding your emergency fund or something like that.

My plan was to save in a roth and use it for a house.  i was 22 or 23 when I conceived the plan.  Fast forward to 36, I still rent and I'm really glad I never raided my roth for a house.  Just saying.  Renting has given me a lot of freedom in terms of being able to invest, and also just living life more leisurely- not worrying about upkeep and home maintenance.  I guess I can't say exactly how life would have played out, but NW now is $650K, FI could be in 5 years or less, and this is all for essentially a one income family of 4.  I occasionally feel tired of renting, but for the most part, life is good.

mtn

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Re: Withdrawals of Roth IRA contributions
« Reply #9 on: June 29, 2016, 11:42:12 AM »
Hey folks--I don't want this to be a "Can I afford a house" thread. I'm asking on the specifics of withdrawing contributions from my Roth IRA, as depending on the answers it might change the type/term/lender of the loan.

But since you're asking:
-My wife and I are 26 (me) and 27 (her)
-I have between 90% and 120% my annual income saved in retirement accounts (2 401k's, IRA)--it varies depending on vesting schedules
-She has about 40% of her annual income saved in retirement accounts (2 401k's, IRA)
-She has student loans with a balance of about 40% of her annual income. We're paying those off aggressively. This is our only debt.
-We have, between the two of us in stocks and cash, enough for about 20% down on a house. However, this would be depleting our emergency fund entirely and it doesn't account for closing costs. Which would normally lead you to say "Don't buy". And I'd agree, buttt...
-We're getting priced out of rentals. Chicagoland housing sucks. (Not going into it here, I have spreadsheets upon spreadsheets weighing the pros and cons of renting vs buying)
-We have "other issues" that are limiting our search area (health, family, commute, safety, affordability, future considerations)
-We're looking at the bottom tier of houses in said search area. At the top of our price range, if one of us were to lose our job we'd have to decrease our savings rate to 10% (of the remaining salary) and we'd be eating Ramen, but still staying afloat.

« Last Edit: June 29, 2016, 11:44:03 AM by mtn »

Daisyedwards800

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Re: Withdrawals of Roth IRA contributions
« Reply #10 on: June 29, 2016, 11:50:12 AM »
I would decrease your retirement savings rate until you have a healthy emergency fund.  The first year my brother bought a house, woodpeckers got into his roof leading to expensive (and not optional) repairs, he had an invasion of bugs (leading to an expensive extermination process), minor flood in basement, and they got record snowfall (again expensive roof and siding problems) and leaks.  Many thousands and 2-3 years later, he's finally able to buy an area rug for his living room.

Daisyedwards800

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Re: Withdrawals of Roth IRA contributions
« Reply #11 on: June 29, 2016, 11:52:14 AM »
And his central AC system needed to be replaced entirely, which he chose not to do yet.

onlykelsey

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Re: Withdrawals of Roth IRA contributions
« Reply #12 on: June 29, 2016, 11:58:11 AM »
I withdrew 7 or 8K from my IRA when I bought, but paid it back 6 weeks later and used the first-time homebuyer exemption.  I was 27 (26?) and figured it was worth it.  It has been.   But for me, I needed to borrow because I needed 20% down and wanted to keep a 10K emergency fund and a 5K house emergency fund..  Is that what you're reaching for?  If it's less than 20% and you still don't have it, it may be wise to reconsider for the reasons folks listed above.

I will STRONGLY second the "make sure you have an emergency fund after you purchase".  I ended up owing 65K not too long after I bought.  Some folks had to sell their apartment and walk away because they couldn't pay the assessment.  I don't think it makes sense to expect 65K of costs (seems very rare), but you should really have a solid five figure house fund AFTER you've made your payments.  I swear we're not all saying this to rain on your parade. 

You can lose your whole investment very easily if you don't have cash around.  I suppose you could try to collateralize your investment accounts, but that can get ugly and expensive really fast.

boarder42

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Re: Withdrawals of Roth IRA contributions
« Reply #13 on: June 29, 2016, 11:58:17 AM »
Yes you can withdraw 6500 without taxes or penalties, but you never get that contribution space back. In your example you could only contribute another 4500 for the year.

For your wife's Roth IRA, same thing, you don't get the contribution space back. So she can only contribute 5500 this year.

If you're a first time home buyer this applies http://www.rothira.com/blog/should-i-use-a-roth-to-buy-a-house
But you still don't get any contributiom space back from that method either

He does get his 2016 contribution space back. 2015 is lost

dandarc

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Re: Withdrawals of Roth IRA contributions
« Reply #14 on: June 29, 2016, 12:21:02 PM »
I will STRONGLY second the "make sure you have an emergency fund after you purchase".  I ended up owing 65K not too long after I bought.  Some folks had to sell their apartment and walk away because they couldn't pay the assessment.  I don't think it makes sense to expect 65K of costs (seems very rare), but you should really have a solid five figure house fund AFTER you've made your payments.  I swear we're not all saying this to rain on your parade. 
This sounds like quite the story - what happened that the association was short that much money?

onlykelsey

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Re: Withdrawals of Roth IRA contributions
« Reply #15 on: June 29, 2016, 12:27:38 PM »
I will STRONGLY second the "make sure you have an emergency fund after you purchase".  I ended up owing 65K not too long after I bought.  Some folks had to sell their apartment and walk away because they couldn't pay the assessment.  I don't think it makes sense to expect 65K of costs (seems very rare), but you should really have a solid five figure house fund AFTER you've made your payments.  I swear we're not all saying this to rain on your parade. 
This sounds like quite the story - what happened that the association was short that much money?

In some small part, lack of reserves was due to incompetence of the condo association/inability to agree on raising fees.  In very large part, the construction company that converted the building in 2010 and sold to the original purchasers took genuinely criminal actions and essentially aggressively hid genuinely dangerous and very illegal structural conditions.  When we discovered them, the DOB evacuated half the building (for nearly 9 months, if I remember correctly, on their own dime) and "replace the roof" turned in to "rebuild two walls of the building from scratch for the top 2.5 floors and reinforce the bricks everywhere and then rebuild a roof and parapet walls and then actually replace the roof membrane".   It turns out the DOB actually has a FORENSIC division, but the company is nowhere to be found, of course.  Our judgment is worthless.

ETA: I got married (self-financed in Manhattan without any help) the same year (of course), so I ended up paying 10K in cash, 30K in HELOC and 25K in 401K loan.  NOT IDEAL.  I was very glad I had opened a HELOC in advance, though, and have been paying 8-10x the minimum, so it's not too bad at 3.something %.
« Last Edit: June 29, 2016, 12:31:36 PM by onlykelsey »

Trudie

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Re: Withdrawals of Roth IRA contributions
« Reply #16 on: June 29, 2016, 12:27:50 PM »
If you do this, you will likely regret it when you are older.

Not if it is part of your ER plan and allows you to retire well before 59 1/2... or if it allows you to stay within certain income ranges for tax purposes or ACA subsidies.  It might very well be a good decision.

johnny847

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Re: Withdrawals of Roth IRA contributions
« Reply #17 on: June 29, 2016, 12:37:31 PM »
Yes you can withdraw 6500 without taxes or penalties, but you never get that contribution space back. In your example you could only contribute another 4500 for the year.

For your wife's Roth IRA, same thing, you don't get the contribution space back. So she can only contribute 5500 this year.

If you're a first time home buyer this applies http://www.rothira.com/blog/should-i-use-a-roth-to-buy-a-house
But you still don't get any contributiom space back from that method either

He does get his 2016 contribution space back. 2015 is lost

Can you link me IRS publications or the section of the US code that states that to be true? Because I looked this up a while ago and found it said contribution, not net contribution.

Cromacster

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Re: Withdrawals of Roth IRA contributions
« Reply #18 on: June 29, 2016, 01:29:30 PM »
Yes you can withdraw 6500 without taxes or penalties, but you never get that contribution space back. In your example you could only contribute another 4500 for the year.

For your wife's Roth IRA, same thing, you don't get the contribution space back. So she can only contribute 5500 this year.

If you're a first time home buyer this applies http://www.rothira.com/blog/should-i-use-a-roth-to-buy-a-house
But you still don't get any contributiom space back from that method either



He does get his 2016 contribution space back. 2015 is lost

Can you link me IRS publications or the section of the US code that states that to be true? Because I looked this up a while ago and found it said contribution, not net contribution.

I'm not sure about the IRS publication, IRS Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs) You do get 60 days to return IRA distributions.

http://finance.zacks.com/report-ira-distribution-refunded-within-60-days-7619.html

Quote
The IRS doesn't permit borrowing from IRAs. However, you can use IRA rollover rules to take the money in your IRA for up to 60 days, tax-free, once per year. Although the rules were originally designed for the purpose of moving money between two different retirement plans, they still apply if you take money out of one IRA -- using it for any purpose -- and then return it within 60 days. You'll only avoid taxes, though, if you do replace the money within 60 days. If you return it on day 61, you'll owe whatever taxes and penalties apply.
« Last Edit: June 29, 2016, 01:32:09 PM by Cromacster »

catccc

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Re: Withdrawals of Roth IRA contributions
« Reply #19 on: June 29, 2016, 02:22:42 PM »
I will STRONGLY second the "make sure you have an emergency fund after you purchase".  I ended up owing 65K not too long after I bought.  Some folks had to sell their apartment and walk away because they couldn't pay the assessment.  I don't think it makes sense to expect 65K of costs (seems very rare), but you should really have a solid five figure house fund AFTER you've made your payments.  I swear we're not all saying this to rain on your parade. 

This.  It isn't a 'can you afford a house' question.  You've said you can, you are looking at bottom tier, I think we all believe you.  But the suggestion is you hold off and build up an emergency fund before you buy.  That seems to make the most sense to me.  Not having an e-fund and becoming a homeowner doesn't sound like a good idea.  But this isn't about affordability, IMO.  There are other factors, and I think e-fund is one of them.

I get the argument that it just happens to be that you put your savings in a roth instead of some other taxable vehicle, which is why you are asking this question.  But if it was in just a regular ol' savings account, I'd be giving the same advice.  You won't have anything left once you get into the house.  Bad idea.

boarder42

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Re: Withdrawals of Roth IRA contributions
« Reply #20 on: June 29, 2016, 02:31:02 PM »
I will STRONGLY second the "make sure you have an emergency fund after you purchase".  I ended up owing 65K not too long after I bought.  Some folks had to sell their apartment and walk away because they couldn't pay the assessment.  I don't think it makes sense to expect 65K of costs (seems very rare), but you should really have a solid five figure house fund AFTER you've made your payments.  I swear we're not all saying this to rain on your parade. 

This.  It isn't a 'can you afford a house' question.  You've said you can, you are looking at bottom tier, I think we all believe you.  But the suggestion is you hold off and build up an emergency fund before you buy.  That seems to make the most sense to me.  Not having an e-fund and becoming a homeowner doesn't sound like a good idea.  But this isn't about affordability, IMO.  There are other factors, and I think e-fund is one of them.

I get the argument that it just happens to be that you put your savings in a roth instead of some other taxable vehicle, which is why you are asking this question.  But if it was in just a regular ol' savings account, I'd be giving the same advice.  You won't have anything left once you get into the house.  Bad idea.

i think EFunds are dramatically over done here

catccc

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Re: Withdrawals of Roth IRA contributions
« Reply #21 on: June 29, 2016, 02:37:39 PM »
I will STRONGLY second the "make sure you have an emergency fund after you purchase".  I ended up owing 65K not too long after I bought.  Some folks had to sell their apartment and walk away because they couldn't pay the assessment.  I don't think it makes sense to expect 65K of costs (seems very rare), but you should really have a solid five figure house fund AFTER you've made your payments.  I swear we're not all saying this to rain on your parade. 

This.  It isn't a 'can you afford a house' question.  You've said you can, you are looking at bottom tier, I think we all believe you.  But the suggestion is you hold off and build up an emergency fund before you buy.  That seems to make the most sense to me.  Not having an e-fund and becoming a homeowner doesn't sound like a good idea.  But this isn't about affordability, IMO.  There are other factors, and I think e-fund is one of them.

I get the argument that it just happens to be that you put your savings in a roth instead of some other taxable vehicle, which is why you are asking this question.  But if it was in just a regular ol' savings account, I'd be giving the same advice.  You won't have anything left once you get into the house.  Bad idea.

i think EFunds are dramatically over done here

Well, I kind of agree, as a reformed cash hoarder, efunds can be over done, for sure.  But OP should have something.  I don't think $5K is unreasonable.  Would it make me nervous, yes.  But $5K is a lot more than nothing.

onlykelsey

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Re: Withdrawals of Roth IRA contributions
« Reply #22 on: June 29, 2016, 02:48:15 PM »
I will STRONGLY second the "make sure you have an emergency fund after you purchase".  I ended up owing 65K not too long after I bought.  Some folks had to sell their apartment and walk away because they couldn't pay the assessment.  I don't think it makes sense to expect 65K of costs (seems very rare), but you should really have a solid five figure house fund AFTER you've made your payments.  I swear we're not all saying this to rain on your parade. 

This.  It isn't a 'can you afford a house' question.  You've said you can, you are looking at bottom tier, I think we all believe you.  But the suggestion is you hold off and build up an emergency fund before you buy.  That seems to make the most sense to me.  Not having an e-fund and becoming a homeowner doesn't sound like a good idea.  But this isn't about affordability, IMO.  There are other factors, and I think e-fund is one of them.

I get the argument that it just happens to be that you put your savings in a roth instead of some other taxable vehicle, which is why you are asking this question.  But if it was in just a regular ol' savings account, I'd be giving the same advice.  You won't have anything left once you get into the house.  Bad idea.

i think EFunds are dramatically over done here

I was particularly referring to a house fund.  I'm not a huge slush fund person, but especially in urban real estate where assessments are an unfortunate reality, having cash or access to it (preferably not in a HELOC like my unlucky/dumb self) is paramount to avoid literally being kicked out of your building.

johnny847

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Re: Withdrawals of Roth IRA contributions
« Reply #23 on: June 29, 2016, 03:23:02 PM »
Yes you can withdraw 6500 without taxes or penalties, but you never get that contribution space back. In your example you could only contribute another 4500 for the year.

For your wife's Roth IRA, same thing, you don't get the contribution space back. So she can only contribute 5500 this year.

If you're a first time home buyer this applies http://www.rothira.com/blog/should-i-use-a-roth-to-buy-a-house
But you still don't get any contributiom space back from that method either



He does get his 2016 contribution space back. 2015 is lost

Can you link me IRS publications or the section of the US code that states that to be true? Because I looked this up a while ago and found it said contribution, not net contribution.

I'm not sure about the IRS publication, IRS Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs) You do get 60 days to return IRA distributions.

http://finance.zacks.com/report-ira-distribution-refunded-within-60-days-7619.html

Quote
The IRS doesn't permit borrowing from IRAs. However, you can use IRA rollover rules to take the money in your IRA for up to 60 days, tax-free, once per year. Although the rules were originally designed for the purpose of moving money between two different retirement plans, they still apply if you take money out of one IRA -- using it for any purpose -- and then return it within 60 days. You'll only avoid taxes, though, if you do replace the money within 60 days. If you return it on day 61, you'll owe whatever taxes and penalties apply.

Yes but this is for rollovers. I suppose that could be used to "rollover" money to/from the same IRA.
Still doesn't prove boarder42's assertion though.

---

boarder42, you still haven't answered my question. You claim that you can make a net contribution of $5500 per year, and I claim you can't (barring any use of the rollover clause above, which is limited to 60 days). Do you have any evidence of your assertion? I can't exactly find any for mine, partly because it's hard to "prove a negative" unless the IRS or the US code specifically says so.

dandarc

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Re: Withdrawals of Roth IRA contributions
« Reply #24 on: June 29, 2016, 03:34:21 PM »
I'm having a hard time finding an exact example on the IRS site, but have found this and a few things like it elsewhere saying you can.

http://www.rothira.com/blog/can-you-return-withdrawn-roth-ira-contributions

The IRS site does say in several places that having your contribution returned before your filing deadline, along with any earnings or loss = it never happened.  If the contribution never happened, why couldn't I contribute again?

https://www.irs.gov/instructions/i8606/ch01.html#d0e529


Dezrah

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Re: Withdrawals of Roth IRA contributions
« Reply #25 on: June 30, 2016, 09:09:55 AM »
How stable is your job?  If it’s very stable, I would actually suggest borrowing against your 401k if permitted. 

Over the years it was drilled into me how incredibly bad this was.  Then I came across some articles that explained the nuance more clearly.  It’s always a bad idea if you’re using it to fund an extravagant lifestyle, but if you’re certain you need to go into debt for a limited amount of time (like you need to buy a house in a safer neighborhood and don’t have the time to save up) then this is actually a pretty great option.

You’ll be able to get your funds and maintain your “retirement space” for your savings.  The real danger is that you could lose your job and be forced to pay back the full amount immediately.  If that happens, you could cash out that chunk of your Roth IRA anyway and you’ll be in the same place you’re currently considering.

In summary, only do this if you meet ALL the conditions below:
-You HAVE to take on debt very soon for the sake of your health (mental or physical) or safety and not just because it would be “nice”.
-You are currently able to save plenty but don’t have enough time to build the cash by the time you need it.
-You borrow no more than you can comfortably pay back in 2-3 years maximum.
-You have a backup plan to pay back a significant amount of the loan in the event of job loss.  You have to commit that this reserve is not tapped for any other purposes.
-You are mentally prepared for the possibility that you will miss out on market growth when you pull out your funds.
-You accept that this is a onetime event and not something you will repeat lightly.
-You understand that you are borrowing from future-you and treat this like an important debt to a loved one.  Imagine how you would feel if you lent money to a friend and then saw him buying expensive cars, eating out every day, upgrading his wardrobe but still insisting he can’t pay you back right now. 

mtn

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Re: Withdrawals of Roth IRA contributions
« Reply #26 on: June 30, 2016, 09:16:50 AM »
How stable is your job?  If it’s very stable, I would actually suggest borrowing against your 401k if permitted. 

Over the years it was drilled into me how incredibly bad this was.  Then I came across some articles that explained the nuance more clearly.  It’s always a bad idea if you’re using it to fund an extravagant lifestyle, but if you’re certain you need to go into debt for a limited amount of time (like you need to buy a house in a safer neighborhood and don’t have the time to save up) then this is actually a pretty great option.

You’ll be able to get your funds and maintain your “retirement space” for your savings.  The real danger is that you could lose your job and be forced to pay back the full amount immediately.  If that happens, you could cash out that chunk of your Roth IRA anyway and you’ll be in the same place you’re currently considering.

In summary, only do this if you meet ALL the conditions below:
-You HAVE to take on debt very soon for the sake of your health (mental or physical) or safety and not just because it would be “nice”.
-You are currently able to save plenty but don’t have enough time to build the cash by the time you need it.
-You borrow no more than you can comfortably pay back in 2-3 years maximum.
-You have a backup plan to pay back a significant amount of the loan in the event of job loss.  You have to commit that this reserve is not tapped for any other purposes.
-You are mentally prepared for the possibility that you will miss out on market growth when you pull out your funds.
-You accept that this is a onetime event and not something you will repeat lightly.
-You understand that you are borrowing from future-you and treat this like an important debt to a loved one.  Imagine how you would feel if you lent money to a friend and then saw him buying expensive cars, eating out every day, upgrading his wardrobe but still insisting he can’t pay you back right now.

2 days ago I would have answered extremely stable. Yesterday my company was acquired, and while I'm now confident that my job is stable (both geographically and the job itself), it is enough to stop me from doing a 401k loan--for all I know, the company will shift our 401k's to their provider next week and I'd be required to pay it back.