1

I have money in my 401(k) I am investing to federal limits for both myself and my wife and I am primarily planning to use this money for my first house downpayment and my thought process is as below:

  1. If I put money in the 401(k), it grows faster because I am not paying any taxes on it + Company's contribution.
  2. I am planning to pull all the money out when I buy a house but I am getting some conflicting information online and I am not sure if I can pull out everything from my 401(k) or there is any limit to what I can borrow?
  3. Are there any rules on the loan length when I borrow money from my 401(k)?
  4. What is the process to borrow money from my 401(k)? Can I directly work with my 401(k) management company or do I have to work with a government agency for this?
  • 3
    Borrowing from the 401(k) means robbing yourself of years of tax-free growth. It is generally not a good idea for anything short of emergencies. – keshlam Aug 14 '16 at 18:35
3

You need to talk to the 401(k) administrator, or HR, for the exact details. Typically, you can only borrow 50% of your balance, and can pay it back up to a ten year term. Some plans have different rules, this is just a common offering.

The larger issue is whether the loan prevents you from making further deposits till repaid. This would cost you not just the growth in the account, but the matched deposits for those years. That would be a deal killer for me. If that were the case, I'd drop my deposits to only get the match, and save for a real deposit without the loan.

  • Now, since you mentioned that it is up to the management company then it begs the question that what if the money in is Vanguard Rollover 401k. Does Vanguard decide at that point? – Lost Aug 14 '16 at 20:18
  • 4
    While vanguard may be the custodian it may be up to the employer. I know that larger employers have more options to pick from when they design their plan. – mhoran_psprep Aug 14 '16 at 21:01
0

If you quit or get fired, you have 60 days to pay back the loan. If you cannot pay back the loan it becomes an early withdrawal subject to taxes and the the 10% penalty. Taking a loan for any significant amount of the down payment is a bad idea for the reasons above.

As an alternative, adjust your contributions down to get your maximum match and stash the extra money outside of your 401k in a brokerage account.

If you have a Roth IRA already, you can into using up to 10k of it for a first time home purchase.

  • This downside can be mitigated by taking out a Personal Line of Credit (that is, an unsecured line of credit) sufficient to pay off the 401(k), and not using the line of credit unless/until you need to make the 401(k) balloon payment. – Jasper Aug 15 '16 at 21:32
  • That would certainly be an interesting strategy, but if you could do that, in the context of a home purchase, I would expect that you'd also be able to get a second mortgage that would serve you better. In bad times (ca. 2008) credit lines were disappearing, so you could still be out of a job and out of a way to pay back that loan. – Todd Aug 16 '16 at 3:54
  • For this purpose, borrowing from a 401(k) plus having an unused PLOC is much better than borrowing from a HELOC. During the 2008-2010 crash, the U.S. government basically told banks to freeze HELOCs (especially ones where the line of credit plus the first mortgage was "too high" compared to a low valuation of the collateral). Whereas this tightening did not affect PLOCs. Also, for purposes of qualifying for a mortgage, debt on a HELOC counts toward debt-to-equity ratios and debt-to-income ratios. Whereas 401(k) debt does not, nor does an unused PLOC credit line. – Jasper Aug 16 '16 at 23:03
  • Furthermore, the existence of an unused PLOC credit line can help persuade a bank loan officer and a bank underwriter that you have some financial reserves. (This might just make up for having tapped the 401(k), though.) – Jasper Aug 16 '16 at 23:03
  • An unused PLOC is cheaper than an unused HELOC, because PLOCs do not have upfront appraisal and mortgage underwriting fees. PLOCs often have significantly higher interest rates than HELOCs. (One multi-regional bank has a 3 percentage point difference between the two rates, for borrowers with excellent credit ratings.) Both PLOCs and HELOCs typically have annual fees. The maximum credit line on a PLOC is often tied to the borrower's income at the time of getting the loan (e.g. 3 months' gross income), whereas the maximum credit line on a HELOC is tied to the home equity. – Jasper Aug 16 '16 at 23:09
-5

You can anything you want with your 401K. It is not a good idea to borrow against yourself unless there are some critical situations you are facing.

  • 1
    More precisely: there are no restrictions on what you can do with money taken as a 401k loan -- but as @JoeTaxpayer pointed out, these loans are more expensive than they may appear, and should usually be considered a last resort short of actually taking premature withdrawals from the 401k and paying the penalty. – keshlam Aug 15 '16 at 1:12
  • The employer and/or plan administrator may certainly require you to describe exactly what you're going to use the money for. Mine has very restricted uses (deposit on home, facing home loss, medical issues) – mkennedy Aug 15 '16 at 19:11

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.