I am a self-employed independent contractor. I'm trying to decide what to do with any extra income I earn over the near future, given that I have the eventual goal of purchasing a house (within 2-3 years). I have no current outstanding debts.
In essence, I'm trying to decide whether to save the excess as cash (which would eventually increase my downpayment amount, after tax), or put it into a pre-tax individual 401(k), from which I could draw a 401(k) loan to put toward the house. I realize that 401(k) loans aren't always as attractive an option as they may seem, so I'm trying to get more input on what would net me the most purchasing power toward the house.
For the sake of argument, suppose the 401(k) would be with a custodian that offers low-fee index funds. Because I am self-employed, the "lose your job" drawback of drawing a loan against an employer sponsored 401(k) plan doesn't apply (in other words, I won't face an immediate payback provision). Of course, there is still the risk that I could lose my contract, but I am reasonably confident I could find another gig within a short enough time frame that making the loan payments won't be a concern.
Given that money can go into the 401(k) pre-tax, and that once the loan is paid off, the principal is restored, I'm having a hard time seeing the downside of this approach. Am I missing something or does it actually make sense in my situation?