Borrowing down payment from 401k??

salsa34 · ‎03-10-2009

Do you experts see any major pitfalls in the following plan?

-Borrow down payment for an FHA loan (3% or 3.5%) from my 401k, around $8,000.

-Purchase home in September of '09.

-Make 401k loan payments until '09 taxes are filed in early 2010.

-Repay 401k loan in full using $8,000 stimulus credit funds. Our plan does not penalize for repaying early.

I'm a 1st time buyer.

Lel · ‎03-10-2009

Sounds like a reasonable plan, though you do run the risk of missing any stock market recovery during those 3-4 months that you've taken money out of your 401(k). I just read that the best-performing days of a recovery typically occur early in its course.

SonorityGenius · ‎03-10-2009

Keep in mind that 401k must be repaid immediately if you lose your job... aside from that, is a good plan but can you get downpayment savings build up until sept comes?

salsa34 · ‎03-10-2009

I would only have the 401k loan outstanding for 4 months or so, then I would pay it back in full with the tax credit.

My job is secure ( I know, I know, famous last words, but really, it is). I am a legal assistant and our firm is in good shape. I've been here since 2001.

bmagnant · ‎03-10-2009

@salsa34 wrote:
Do you experts see any major pitfalls in the following plan?

-Borrow down payment for an FHA loan (3% or 3.5%) from my 401k, around $8,000.

-Purchase home in September of '09.

-Make 401k loan payments until '09 taxes are filed in early 2010.

-Repay 401k loan in full using $8,000 stimulus credit funds. Our plan does not penalize for repaying early.

I'm a 1st time buyer.

If you do that, run the w-4 calculator at the IRS website and start getting your $8000 now. I am building a house, so I will get the credit, but not until next year. I have stopped withholding federal income tax now, so instead of getting $8000 next year, I am getting $500 / month right away. The IRS calculator told me to claim 15 exemptions, which reduced my fed tax withholding to about $10 / paycheck.

If you could do that, and start paying that directly back to your 401k loan, you might be better off.

john398 · ‎03-10-2009

@Lel wrote:
Sounds like a reasonable plan, though you do run the risk of missing any stock market recovery during those 3-4 months that you've taken money out of your 401(k). I just read that the best-performing days of a recovery typically occur early in its course.

True but by September his 401k could look a lot different either way than it does now....I guess he just has to wait and see

I plan on doing something similar by the way, nice to see I am not the only one thinking this