$50k loan from 401k for house

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raamakoti
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$50k loan from 401k for house

Post by raamakoti » Fri Aug 11, 2017 2:37 pm

I have $200k in my 401k and we are in the process of closing a 424k house with 340k mortgage. We don't need the money to pay for the down payment.
The crazy thought we have is should we each take 50k from our 401ks and knock that mortgage by and then pay that interest ourselves?
Is 50k limit per household or can I take 50k from my wife's account as well?
I would appreciate your thoughts. Thanks

ERISA Stone
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Re: $50k loan from 401k for house

Post by ERISA Stone » Fri Aug 11, 2017 2:43 pm

raamakoti wrote:I have $200k in my 401k and we are in the process of closing a 424k house with 340k mortgage. We don't need the money to pay for the down payment.
The crazy thought we have is should we each take 50k from our 401ks and knock that mortgage by and then pay that interest ourselves?
Is 50k limit per household or can I take 50k from my wife's account as well?
I would appreciate your thoughts. Thanks
Assuming both accounts have at least 100k in vested account balances and the plan allows a loan from all vested sources, you can take $50k from each. My opinion is that you should only take a loan from your 401k plan if you were going to take a loan regardless and you believe the 401k loan provides the best incentive.

Some things to consider:

1. Interest on a 401k loan is not deductible.
2. Consider the potential lost earnings on the $100k being invested in the pre-tax 401k plan.
3. I assume you can get a lower interest rate from a bank, rather than your 401k plan. This will vary by plan though.

You are likely going to get some people on here that tell you your interest payments on the 401k plan are double-taxed. They aren't. https://thefinancebuff.com/401k-loan-do ... -myth.html

mhalley
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Re: $50k loan from 401k for house

Post by mhalley » Fri Aug 11, 2017 2:52 pm

401k loans are best for people with no other way to achieve a financial goal. I don't think it is a good idea in your situation. Interest rates on mortgages are extremely low, paying off a mortgage in general might not be a great idea. Plus you miss out on potential stock market gains.

SimonJester
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Re: $50k loan from 401k for house

Post by SimonJester » Fri Aug 11, 2017 2:53 pm

Way too risky...
In many 401k plans if you lose or change your job you will have to pay back the 401k loan in 60 days otherwise the loan becomes a withdraw and your are hit with the 10% penalty plus tax.

Next you are going to remove a substantial chuck on money out of your 401k and will lose out on the compounding effects.

I think this article covers it very well...

http://www.hullfinancialplanning.com/4- ... 01k-loans/
Last edited by SimonJester on Sat Aug 12, 2017 8:30 am, edited 1 time in total.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

thangngo
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Re: $50k loan from 401k for house

Post by thangngo » Fri Aug 11, 2017 3:00 pm

You're choosing this...
Image

over early retirement and/or financial independence?

A big NO for loan from your 401k unless it's a matter of life or death.

AnotherSecondOpinion
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Re: $50k loan from 401k for house

Post by AnotherSecondOpinion » Fri Aug 11, 2017 4:13 pm

Probably a bad idea to get into the habit of thinking that 401k money is available. I'd only open the 401k early for an emergency, this doesn't sound like one.

Billionaire
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Re: $50k loan from 401k for house

Post by Billionaire » Fri Aug 11, 2017 5:33 pm

I vote NO. 401K's are a money making steamroller. Don't slow it down.

raamakoti
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Re: $50k loan from 401k for house

Post by raamakoti » Fri Aug 11, 2017 5:43 pm

Thank you for all the replies. I was considering because the interest would be going to my 401k instead of bank. But I see the point to loosing compounding effect. If we have 8 years of bull market I will regret the decision, if the market went south in next 3 - 4 years after a remarkable bull run so far I would still regret for not taking loan at the peak.

For now I will leave as is. Why create a headache for myself. I guess I will get used to the mortgage after getting one. Never had this big of loan in my life so may be it is making me bit edgy.

TravelforFun
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Re: $50k loan from 401k for house

Post by TravelforFun » Fri Aug 11, 2017 5:53 pm

I have taken out 401k loans many times in my life but I only did it when I really needed the money, I felt that my job was safe, and I couldn't borrow a lower-interest loan from another source. Let me debunk a few myths about 401k loans.

- 401k loan forces you to pay tax twice or you pay the loan with after-tax money and you pay taxes again when you withdraw from 401k. Well, the reality is that you pay all loans with after-tax money, and of course, you always pay taxes on 401k withdrawals so there is no difference.

- 401k loan eliminates investment growth. Well, I would rather use 5% 401k loan to pay off a 12% credit card. My net worth would grow quicker this way and net worth is what counts.

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whodidntante
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Re: $50k loan from 401k for house

Post by whodidntante » Fri Aug 11, 2017 5:56 pm

You and your wife can take up to 50% of the vested balance, up to 50k, a potential total of 100k for both of you. If your 401k plan allows continued payments after job loss, I think it's fine. Otherwise, you might have a balloon payment due just as you lose your job.

MiddleOfTheRoad
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Re: $50k loan from 401k for house

Post by MiddleOfTheRoad » Fri Aug 11, 2017 6:01 pm

I did this when we bought our second house while holding on to the first house as well. We needed the extra 50k to meet the heavy cash requirement during the housing crisis. However, we did this because at the time I believed the housing market in the bay area was heating up and no way I was going to get a house like ours at the price we paid if we waited. In addition I was already dabbling in some real estate investments at the time so I know the market fairly well. Even then I struggled with the decision. Luckily I was right with my guess and we did well on the move. I otherwise would not do it.

Remember you pay the interest with after tax dollars (then it will become "pre-tax" when it's paid into a 401k), then you have to pay tax again on those interest dollars when you take it out in retirement. Make sure you really crunch the numbers and assess your situation very carefully before proceeding. With the info and reasoning that you provided I would not do it.

Good luck!

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Watty
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Re: $50k loan from 401k for house

Post by Watty » Fri Aug 11, 2017 6:20 pm

In addition to the above there are three other possible issues to consider.

1) I would assume that the interest on the 401k loan would not be deductible as mortgage interest.

2) Your lender would have to know about and approve you getting those loans.

3) Some companies will not allow you to make 401k contributions while you have an outstanding 401k loan. The company I retired from would not allow you to make 401k contributions until six months after the loan was paid back.

TropikThunder
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Re: $50k loan from 401k for house

Post by TropikThunder » Fri Aug 11, 2017 9:11 pm

raamakoti wrote:I have $200k in my 401k and we are in the process of closing a 424k house with 340k mortgage. We don't need the money to pay for the down payment.
The crazy thought we have is should we each take 50k from our 401ks and knock that mortgage by and then pay that interest ourselves?
Is 50k limit per household or can I take 50k from my wife's account as well?
I would appreciate your thoughts. Thanks
401k/403b loans have become less of a resounding NO over recent years, and as ERISA Stone points out, there are a lot of misconceptions about them. In my case (and I realize it's not like this for many), I am taking a $20,000 loan from my 403b at TIAA-CREF for a house purchase because in my situation, the pros outweigh the cons:
  • - It's a collateralized loan, which means it isn't a withdrawal. TIAA will place $22,000 (110%) of my loan amount in a collateralized TIAA Traditional Annuity account currently paying 3.25% so my funds will still be invested (in fixed income, which means I may need to adjust my overall asset allocation elsewhere).
    - The loan carries an interest rate of 4.16%, which is only slightly higher than prevailing mortgage rates (3.750 - 4.000) but cheaper than from any other source I could use (like a piggyback 2nd mortgage).
    - I can increase my down payment from 5% to 10%, which will reduce my rate by ~0.125% or so, and reduce my PMI factor from 0.68 to 0.50. This also puts me farther ahead on the track to <80% LTV when I can remove PMI. I'd rather be paying "myself" back than paying the bank.
    - The lower LTV, rate, and PMI will reduce my PITI by about $175 vs my loan payments of $208 (and I can prepay whenever I want).
    - I can continue to make contributions while the loan is outstanding.
    - Since it's not a withdrawal, my plan allows continued payments after termination of employment rather than forcing a taxable distribution.
This (and access to Traditional and TIAA Real Estate) are the best parts of TIAA-CREF.

Jags4186
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Re: $50k loan from 401k for house

Post by Jags4186 » Fri Aug 11, 2017 9:41 pm

TravelforFun wrote: - 401k loan forces you to pay tax twice or you pay the loan with after-tax money and you pay taxes again when you withdraw from 401k. Well, the reality is that you pay all loans with after-tax money, and of course, you always pay taxes on 401k withdrawals so there is no difference.
I always thought this "double tax" line people fed was the stupidest thing. You're not paying double tax. You're getting to use pretax money for after tax uses. Of course you're going to pay it back with after tax money or else you'd be getting tax free money.

TravelforFun
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Re: $50k loan from 401k for house

Post by TravelforFun » Fri Aug 11, 2017 10:04 pm

Jags4186 wrote:
TravelforFun wrote: - 401k loan forces you to pay tax twice or you pay the loan with after-tax money and you pay taxes again when you withdraw from 401k. Well, the reality is that you pay all loans with after-tax money, and of course, you always pay taxes on 401k withdrawals so there is no difference.
I always thought this "double tax" line people fed was the stupidest thing. You're not paying double tax. You're getting to use pretax money for after tax uses. Of course you're going to pay it back with after tax money or else you'd be getting tax free money.
Even people like Suze Orman uses that phrase which is so misleading.

MiddleOfTheRoad
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Re: $50k loan from 401k for house

Post by MiddleOfTheRoad » Fri Aug 11, 2017 10:57 pm

"I always thought this "double tax" line people fed was the stupidest thing. You're not paying double tax. You're getting to use pretax money fror after tax uses. Of course you're going to pay it back with after tax money or else you'd be getting tax free money"

Correct, The principle you borrow is pretax money and only taxed once. The interest that you pay yourself on the loan in the 401k is paid with your after-tax money. Then that same after-tax interest money that you paid yourself is taxed again when it is time to withdraw from the 401k.

So effectively, the 4% interest that you paid yourself is actually a higher interest rate depending on your tax bracket. And that is only one of the disadvantage. Hardly an advantage in the OP's situation. But if you know what you are leveraging on then it is fine, just know what it costs before you go in.

Example: 4% interest of 50k is 2k per year in interest. Let's say your tax bracket is 25% so you have to make 2.5k before tax money to pay that interest. Then the 2k interest paid into the 401k is taxed again at retirement -->1.6k. but since you are paying yourself and get to keep that 1.6k the effective interest rate is 900/50k in a year, which is 1.8%. Great! but then you realize that 50k could have earned 7% (or much higher in the last few years) if it was invested. So you are down at least 4.8%, more if the market is stronger.

But as I said, I did this as well. Just know the cost going in and why.

TravelforFun
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Re: $50k loan from 401k for house

Post by TravelforFun » Fri Aug 11, 2017 11:30 pm

MoR, I'll try to break down your example and compare 401K loan scenario vs. regular loan scenario.

Example: 4% interest of 50k is 2k per year in interest. Let's say your tax bracket is 25% so you have to make 2.5k before tax money to pay that interest (you pay all loan interest with after-tax money whether it's 401k or a bank loan). Then the 2k interest paid into the 401k is taxed again at retirement -->1.6k (all gains in 401k are taxed whether the gain comes loan interest or stock market) .

There is no difference reagarding taxes when it comes to borrow from 401k or a bank.

MiddleOfTheRoad
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Re: $50k loan from 401k for house

Post by MiddleOfTheRoad » Sat Aug 12, 2017 12:05 am

TravelforFun
Ok, so we should do a comprehensive example just with the numerical disadvantage. Forget about all the job loss, administrative disadvantage.

Assumption: market return 7%. 4% loan interest of 50k which is 2k. Marginal tax rate 25%. Let's put everything in pre-tax number so we compare apples to apples.

401k loan: 2666 pretax to make 2k post tax interest payment. get back 1.6k at the end --> 1k (pretax) interest cost the first year. (you are taxed at 38% on that 2666 instead of 25%) Lose out on 7% of 50k, which is 3500. Total cost (interest and opportunity cost): neg $4500 pretax money for the first year.

Bank loan: 2666 pretax money --> 2k interest with after tax money, but you get to deduct 2k tax so let's round it to 2k pretax cost in loan interest in the first year. Gain 7% of 50k in the market, $3500. NET: positive pretax money $1.5k.

As you can see, there is a spread of 6k for just the first year, on a 50k loan between bank and 401k. But if you think your property is going up more than that in a year and you need the money to get it then sure.

If your marginal tax rate is higher, the disadvantage gets bigger. If market is up more then the spread is more, and it favors the 401k scenario if the market is down. As you can see only when the market return around 1% it is an even scenario, but of course we don't know where it is heading. If you drag the loan out for a few years then the probability of losing is high.

Please check my post for errors :D These numbers are getting to me haha
Last edited by MiddleOfTheRoad on Sat Aug 12, 2017 12:28 am, edited 2 times in total.

kjvmartin
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Re: $50k loan from 401k for house

Post by kjvmartin » Sat Aug 12, 2017 12:10 am

raamakoti wrote:I have $200k in my 401k and we are in the process of closing a 424k house with 340k mortgage. We don't need the money to pay for the down payment.
The crazy thought we have is should we each take 50k from our 401ks and knock that mortgage by and then pay that interest ourselves?
Is 50k limit per household or can I take 50k from my wife's account as well?
I would appreciate your thoughts. Thanks
One of my biggest regrets is a 401k loan for a house. I could have put less money down, and I should have.

SimonJester
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Re: $50k loan from 401k for house

Post by SimonJester » Sat Aug 12, 2017 8:39 am

kjvmartin wrote: One of my biggest regrets is a 401k loan for a house. I could have put less money down, and I should have.
Here is another aspect to this whole issue. Your 401k is protected from creditors, your house may or may not depending on your state laws.

If the housing market tanks again, and you lose your job or have other issue forcing your into foreclosure with an underwater house you are way worse off than having left the money int he 401k account.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

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sunny_socal
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Re: $50k loan from 401k for house

Post by sunny_socal » Sat Aug 12, 2017 10:07 am

I have done many 401k loans, but only as a "bridge loan." It's paid back within 6 months, often within a month. I wouldn't permanently pull money out of my 401k.

jumppilot
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Re: $50k loan from 401k for house

Post by jumppilot » Sat Aug 12, 2017 10:35 am

raamakoti wrote:
Fri Aug 11, 2017 2:37 pm
I have $200k in my 401k and we are in the process of closing a 424k house with 340k mortgage. We don't need the money to pay for the down payment.
The crazy thought we have is should we each take 50k from our 401ks and knock that mortgage by and then pay that interest ourselves?
Is 50k limit per household or can I take 50k from my wife's account as well?
I would appreciate your thoughts. Thanks
I took out a $15,000 401k loan to pay off debt and plan to take a $50,000 5 year loan to buy a house.

I feel comfortable doing this because, over the last 8 years, I've put a significant amount per year into my retirement accounts, with that probably continuing into the future. I consider the 401k loan interest to be a bond portion of my portfolio.

I have no regrets.

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