401K loans

[Anonymous]

Got approved for a home loan today and now all we gotta do is find a house..LOL But we was thinking of borrowing some money from my wifes 401k plan.We was gonna borrow $3500,they said we could finance it up to 60 months at 4% intrest.We would be useing the money for home inspection, appraisal and possibly the survery.Is it a good idea to borrow from your 401K? Will this show up on your credit report?

[AndySoCal]

No it will not show on your credit report. You are the lender and the borrower in this case. Keep in mind there are tax consequences if you leave and do not fund the balance. Check with the plan administrator for details on possible tax consequences.

[kimmiller112]

Don't do it.  You end up paying taxes twice on the amount you borrow, when you borrow it and when you take it out when you retire.

[VirtualCuriosity]

I would agree with not borrowing from the 401k plan.  No pros, only cons.  Some will say that the only time you might want to borrow is to avoid a home forclosure, so long as it permanently avoids it.

[Anonymous]

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@Anonymous wrote:

Got approved for a home loan today and now all we gotta do is find a house..LOL But we was thinking of borrowing some money from my wifes 401k plan.We was gonna borrow $3500,they said we could finance it up to 60 months at 4% intrest.We would be useing the money for home inspection, appraisal and possibly the survery.Is it a good idea to borrow from your 401K? Will this show up on your credit report?

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If it is just $3500, why not add it to your mortage, or get a personal loan? You can even finance it on your credit card.

You're getting hit by double taxation whenever you borrow from 401k. The financing cost itself is wayyyyyy more than whatever interest rate your credit card company hits you with.

[OhioCPA]

A 401(k) loan makes sense if your other sources of financing are at a higher post tax deduction interest rate. For example, a 4% rate on a 401(k) loan beats taking a loan against a credit card at a higher rate. This assumes that the return within the 401(k) during the period of the loan doesn't exceed the 4%.

[FutureBillionaire]

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@OhioCPA wrote:

A 401(k) loan makes sense if your other sources of financing are at a higher post tax deduction interest rate. For example, a 4% rate on a 401(k) loan beats taking a loan against a credit card at a higher rate. This assumes that the return within the 401(k) during the period of the loan doesn't exceed the 4%.

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Ditto.  You pay yourself back interest and don't have any additional debt on your credit report.  My job takes my payments out of my paycheck.  It's a great tool that I use frequently. 

[Anonymous]

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@kimmiller112 wrote:

Don't do it.  You end up paying taxes twice on the amount you borrow, when you borrow it and when you take it out when you retire.

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You don't pay taxes on money you borrow from 401K.  It's a loan, not a withdrawal.  And assuming the OP is beyond 59 1/2 when he retires, there won't be additional tax consequences then either. 

The real cost of doing a 401K loan is that the money is not in your account growing during the time you're paying it back.  And some plans do not allow you to contribute funds when you have an outstanding loan. 

But to the OP: you say you can pay it back on 60 months, which tells me you're just getting a general purpose loan.  Residential loans can be paid back in as much as 20 years, so you could look into that as well.  It would be less money from your check every payday, and with the small amount you are borrowing, you could easily put the lump sum balance back into your 401k when you got your tax refund, or a bonus or something. 

[Anonymous]

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@Anonymous wrote:

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@kimmiller112 wrote:

Don't do it.  You end up paying taxes twice on the amount you borrow, when you borrow it and when you take it out when you retire.

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You don't pay taxes on money you borrow from 401K.  It's a loan, not a withdrawal.  And assuming the OP is beyond 59 1/2 when he retires, there won't be additional tax consequences then either. 

The real cost of doing a 401K loan is that the money is not in your account growing during the time you're paying it back.  And some plans do not allow you to contribute funds when you have an outstanding loan. 

But to the OP: you say you can pay it back on 60 months, which tells me you're just getting a general purpose loan.  Residential loans can be paid back in as much as 20 years, so you could look into that as well.  It would be less money from your check every payday, and with the small amount you are borrowing, you could easily put the lump sum balance back into your 401k when you got your tax refund, or a bonus or something. 

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You don't pay taxes on the money borrowed persay but you do pay taxes on the amount that you have to pay back in.  And then again when you withdraw from it during retirement.  A 401k loan is a bad bad idea.  The total interest may actually be way more than a standard loan.  It may only be 3500 pretax however the amount you have to earn before taxes to pay it back may be 4500 or more.  Plus the interest on the loans itself plus the taxes that will get taken out when you retire.  It just doesn't make sense to take out a 401k loan for such a small amount. 

[Anonymous]

In general, I'd say they are a bad idea. But not when you have such a small loan amount, and you can build equity in a house.  A lot of people are buying homes lately, and as soon as they close, they have a ton of equity built up as they bought the home much cheaper than it's appraised for.  Definitely worth it to do that. 

Also, as I said, with a loan that small...you only need to put back the lump sum balance to get rid of the loan...you don't need to pay it over 60 months.  So again, you wouldn't necessarily need to pay all that interest. 

OP would be ahead by a lot if they secured the home with the help of the loan, especially if it's paid back in a timely fashion. No question.