Author Topic: Borrowing from a 401k for down payment--downfalls?  (Read 660 times)

jkitiara

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Borrowing from a 401k for down payment--downfalls?
« on: November 24, 2017, 04:32:04 PM »
So my husband and I are scraping together our down payment for a house in the horrifically expensive Bay Area. Our current plan is to take $90k out of his 401k to get the rest. This seems like a great idea because although you have to pay it back (with interest) you are paying it back to yourself. We also both have Roth and SEP Iras but these each seem to have their own issues to borrow from.

Is there a downside I'm not seeing?

Please ignore the fact that we *should* have 20% in cash before buying. Not gonna happen, and I'm sick to death of renting.

rpr

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #1 on: November 24, 2017, 05:10:04 PM »
I'm assuming that you are going to take a loan from the 401k. I assume that you have read about all the ramifications of this decision.

The biggest thing, AFAIK, is that if for some reason you lose your job or quit, the loan may became fully payable immediately. If you don't then there are penalties and taxes to consider.

Also, some 401ks will not allow any further contributions unless the loan is paid off.

Nate79

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #2 on: November 24, 2017, 08:24:52 PM »
So my husband and I are scraping together our down payment for a house in the horrifically expensive Bay Area. Our current plan is to take $90k out of his 401k to get the rest. This seems like a great idea because although you have to pay it back (with interest) you are paying it back to yourself. We also both have Roth and SEP Iras but these each seem to have their own issues to borrow from.

Is there a downside I'm not seeing?

Please ignore the fact that we *should* have 20% in cash before buying. Not gonna happen, and I'm sick to death of renting.
The downside is that it sounds like you haven't reviewed the rules for your plans 401k loans. The max allowed by law is $50k.

From the IRS:
The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less.

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Indexer

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #3 on: November 24, 2017, 09:02:17 PM »
+1 to everything Nate and rpr have said.

In addition, some 401k plans will allow you to make payments after you terminate employment. They are very rare, you would have to ask HR.

On downside that hasn't been mentioned: Opportunity cost, this money is no longer invested.

Dicey

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #4 on: November 25, 2017, 10:28:15 AM »
...and I'm sick to death of renting.
Sorry, this is a terrible reason. Maybe the worst reason of all. Maybe even approaching facepunch territory.  It sounds like you're saying you want something that you can't afford. This is the wrong place to seek affirmation, if that's the case. Better to seek out loan programs that allow lower down payments. It's fine if you do that, as long as you promise not to whinge about paying MI.

Borrowing against my 401k is by far the thing I regret most. I made a killing with the $6k I borrowed, but I felt trapped in my job until I got that sucker paid off. Hated that feeling. Hated it.
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jkitiara

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #5 on: November 26, 2017, 12:04:19 PM »
The downside is that it sounds like you haven't reviewed the rules for your plans 401k loans. The max allowed by law is $50k.

From the IRS:
The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less.


Yes! This. I knew there was a something I was missing, I just couldn't figure out what. There is just over $90k in there so we can really only borrow $45k.

However, more importantly, my husband is no longer at the job for this 401k so it looks like we can't borrow from it at all. I didn't even know that was a question I needed to ask, you know what I mean?

...and I'm sick to death of renting.
Sorry, this is a terrible reason. Maybe the worst reason of all. Maybe even approaching facepunch territory.  It sounds like you're saying you want something that you can't afford. This is the wrong place to seek affirmation, if that's the case. Better to seek out loan programs that allow lower down payments. It's fine if you do that, as long as you promise not to whinge about paying MI.

Borrowing against my 401k is by far the thing I regret most. I made a killing with the $6k I borrowed, but I felt trapped in my job until I got that sucker paid off. Hated that feeling. Hated it.

Yes, Dicey, I am entirely aware of the facepunch aspect, which is why I said to ignore it. Definitely not seeking affirmation from anyone. My choice, which I am going into with eyes wide open. This is preliminary research for where to find the money. If it didn't seem smart, we wouldn't use it.

Indexer

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #6 on: November 26, 2017, 10:00:49 PM »
However, more importantly, my husband is no longer at the job for this 401k so it looks like we can't borrow from it at all. I didn't even know that was a question I needed to ask, you know what I mean?


Does he have a new employer with a new 401k? You can most likely roll the old 401k into the new one, and then you might be able to do the loan.

Cwadda

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #7 on: November 27, 2017, 12:45:54 AM »
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Not gonna happen, and I'm sick to death of renting.
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Yes, Dicey, I am entirely aware of the facepunch aspect, which is why I said to ignore it.
Ah, yes. Consumerism at its finest.

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Maybe even approaching facepunch territory.
It's not approaching facepunch territory. It IS facepunch territory, no doubt.

jkitiara

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #8 on: November 27, 2017, 12:31:48 PM »
Thanks for the suggestion Indexer. But he is currently freelance, no 401k. We dump around $30k a year into a SEP IRA to keep our tax bill low, which is why I was hoping to use another retirement account for the house. I know we can take $10k each out of our IRAs but I think that's going to be it.

Kroaler

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #9 on: November 27, 2017, 12:44:26 PM »
I borrowed from the old 401k this year.      Read all the woes and nos and proceeded anyway. . .

I regret that decision.   The market has been soaring lately and I missed out...

I regret it for other reasons also...

jkitiara

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Re: Borrowing from a 401k for down payment--downfalls?
« Reply #10 on: November 29, 2017, 11:44:24 AM »
I borrowed from the old 401k this year.      Read all the woes and nos and proceeded anyway. . .

I regret that decision.   The market has been soaring lately and I missed out...

I regret it for other reasons also...

Thanks for the insight! It seems to be not the right move for us now, even if we were allowed to do it.