Borrowing from 403b for Remodel Projects

[LearningMustachian72]

Hey,

My wife and I are maxing out my 401k and her 403b/457 ($58,500 annually).

This is roughly 50% of our take home pay and doesn’t leave us much room for savings beyond this while living the lifestyle we are comfortable with.

I am considering borrowing $20k from one of these accounts for home remodel projects, ripping out old carpet and putting in hardwood, replacing some tile.  While these projects are not necessary, we have dogs and the carpet is quite grimy/harder to clean than other rooms in our house where we have wood flooring.

Is this a mistake? I know the cons regarding opportunity cost and after tax repayment but thinking it may make sense in our situation.

Any thoughts/guidance appreciated.  Thank you.

[roomtempmayo]

Why not just reduce your contribution by 20k for this year and divert that money to remodeling?  In other words, why put money in the 403 only to take it back out again?

[seattlecyclone]

Why not just reduce your contribution by 20k for this year and divert that money to remodeling?  In other words, why put money in the 403 only to take it back out again?

A point in favor of the loan is that if you reduce your contribution this year you lose that tax-advantaged space forever. If this is just for a one-time short-term cashflow thing and you plan to be able to max out your retirement accounts this year and in future years, taking out a loan for a few months can make sense.

[wageslave23]

I like the idea of making myself "work" or save for a big purchase.  So I'd recommend scrimping and saving from your normal cashflows after maxing out your retirement accounts.  You will appreciate the upgrades more if you had to sacrifice for a year or two to save up for them.  Taking money out of savings or taking out a loan is the easy way, I consider it cheating. 

[Effervescent]

Is this a mistake? I know the cons regarding opportunity cost and after tax repayment but thinking it may make sense in our situation.

It's not a mistake, but as you say, there are significant disadvantages to borrowing from a 403b, like the opportunity cost of the $20,000 not bringing home investment returns, and having to pay back the 403b loan with after-tax income, with interest. As an example, the rate to borrow from my 403b is 4.25%, a rate that will likely increase in the years to come.

It makes more sense to borrow from a 403b if reducing your adjusted gross income brings you access to benefits besides reducing your tax bill. For example, reduced student loan payments (some make payments through IBR, 10% of their AGI), increased health care subsidies, etc. If there's no benefit besides reducing your tax bill, the overall advantage of borrowing from a 403b to do home renovations becomes minor as compared to just saving up the money over time. And there's the mental stress of keeping up with payments on a $20,000 loan.

Another option is to take out a home equity line of credit to do home renovations, if you own your home.

[LearningMustachian72]

Thank you everyone for the replies.

The reason for borrowing rather than reducing savings rate is due to student loan repayment options as someone stated.  I will explore HELOC as well.

Again, appreciate the feedback.

[Dicey]

Not sure how a 403b is different than a 401k, but I once borrowed against my 401k when I got a screaming deal on a property. The loan was only $6k and I made a killing on the property, but the loan had a pay it back within 30 days of separation clause that I found extremely oppressive. I freaking hated the feeling of owing my soul to the company store. I didn't anticipate that, and I busted my ass to pay it off. Which reminds me, any early payoff was required to be a lump sum for the full amount. Man, I was happy to kill that sucker!

[rmorris50]

I borrowed from my 401(k) a few years ago to remodel my house. Really what you are doing is borrowing against your future salary when you do this.

It’s not true you are double taxed on the repayments, but only on the interest you are paying yourself. But that is still a downside. I think this nuance is harder to communicate so it just gets boiled down to you get double taxed.

Another downside is you are paying yourself your return (interest) instead of earning it in the market.

The big risk in my mind is separating from service and having to pay the balance back, otherwise it becomes an early distribution subject to taxes and tax penalties. I went through this, I lost my job but luckily I was ably to pay the remaining balance back.

So I would answer your question by taking the view am I okay borrowing from my future salary, which will turn into an early retirement distribution if I don’t pay it back if for some reason I am no longer working there.


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[Metalcat]

I can't give you any advice without knowing what alternatives you are considering or what kind of input you want.

Are you asking for ways to optimize borrowing for home renos or asking if it's a good idea to borrow to do home renos??

I can't tell from the OP what part you are struggling with and need input with specifically?

[Effervescent]

Thank you everyone for the replies.

The reason for borrowing rather than reducing savings rate is due to student loan repayment options as someone stated.

If you can reduce your student loan payments by continuing to reduce your adjusted gross income, then I think that this makes borrowing from your 403b the better strategy (as compared to just taking the higher salary with a higher AGI). Assuming you're on an income-based student loan repayment plan, you're probably saving 10% in just reduced student loan payments alone by contributing to your 403b - 10% less in loan payments of whatever amount you contribute to your 403b. Even if your student loan repayment interest rate if 5-6% and you're not paying off your student loans as quickly, you get that money back by investing the difference in the stock market.

Student loan forgiveness/loan reduction also seems to be a possibility in the current political climate.