I can’t tell you the number of times I’m asked this question:
Is it ever OK to borrow from my 401K?
And here is always my answer:
It would be acceptable to borrow from your 401(k) if you had one house on the market for sale, and you were buying another replacement house. In this fashion, you would simply effect the loan to help with the cost of the new home’s down payment, perhaps, until the pending sale settlement. Since the 401(k) loan limit is $50,000 however, this may have limited application.
Alternatively, if you were waiting for a predictable income inflow and had an emergency expense in the interim….like a roof needing emergency repair/replacement and you receive monthly rental monies you could easily borrow from your “left pocket” 401(k) to pay for the repair, knowing that rental monies would be flowing into your “right pocket” each and every month, such that the 401(k) loan would be repaid.
Finally, and this IS a stretch, IF you were out of work, and were diligently seeking re-employment, it may be prudent to borrow from your 401(k) ONLY if you drew up an amortization schedule and systematically repaid the loan each and every paycheck once the new job was landed.
My biggest reservation on all this is that most folks do not repay that loan, and so the point of putting it aside in the first place is made moot. If you want income in retirement, you have to save for it by putting money aside. A 401K, indeed any IRA, left untouched, is a terrific tool and that money should be left to compound and grow in peace.
So I need my roof replaced. I have $160,000.00 in my 401k $23,000.00 of it is not in any stocks or bonds. I was out of work for 6 months got a new job making half of what I did before. Can I barrow Money for my roof I also owe $17k in credit cards can I barrow to pay them off?
Congratulations on landing another job, Shawn! IF you are now living well within your means, especially with your new lower salary, I could see the advantage to paying for the roof and perhaps paying off some or all of your credit cards with a 401(k) loan, The rule is that one can borrow the lesser of $50,000 or one-half of your retirement plan balance, $50,000 in your case.
You would have to transfer the 401(k) from your former employer to your current employer’s 401(k) plan in order for the new employer to withhold the correct repayment amount from your current paycheck. Realize too, that SHOULD you leave your current employer with an outstanding 401(k) loan, you would be required to repay the loan, or if you could not, the outstanding loan amount would be deemed a distribution, and taxed to you in your current tax bracket, and you would also have to pay an early withdrawal penalty of 10% if you are under age 59 1/2.
HOWEVER be advised that 401(k) loans for purposes-other-than-the-purchase-of-a-new-home, are amortized over a 5 year period, and repayments are deducted directly from your paycheck. I love the fact that the loan will get repaid, automatically from your paycheck, AND that the interest rate you are paying is credited right back into your account.
Depending on the interest rate charged however, this monthly repayment amount could be sizable. For example, a $17,000 loan over 5 years at 5% interest equates to a $320.81 monthly repayment deduction from your paycheck that automatically gets deposited into your 401(k) account. The same $17,000 loan at 4% equates to $313.08 per month. Add the cost of the roof repair atop that credit card loan amount and if you cannot afford the repayment schedule, given that the loan amortization period is a short 5 years, then work backwards to determine how much you can afford as a monthly repayment, and borrow that amount.
Your credit card debt is generally amortized over a much longer period than 5 years, hence the low minimum payment thereon.
If you have established a Home Equity Line of credit–with your house value as collateral–I may suggest that you utilize that line of credit for either the roof repairs OR the repayment of credit card debt, since the amortization of a Home Equity Line is generally 15 or 20 years, resulting in a lower payment. Remember, you can always send in extra principal payments any month as well to reduce the overall interest you are paying. In the case of borrowing from a Home Equity Line, one can generally tax-deduct the interest paid on amounts borrowed up to $100,000, so in this way, you convert the interest you are paying on the credit cards to tax-deductible interest, which is favorable to non-tax-deductible interest.
So, figure our what you can afford to pay each month towards the loan repayment and possibly utilize both of these seemingly available sources–401(k) loan and/or Home Equity Loan.
Good luck Shawn, and write back if you have further questions!
If we have $150,000 in 401 and borrow $38,000 to use for a down payment on a new home, how does the repayment work?
It depends on whether or not your new home purchase is your FIRST home purchase or not. If monies are borrowed for a FIRST home purchase, the amortization period used for the repayment schedule is generally 10 years. If the monies borrowed are for other-than-a-first home purchase, the amortization schedule is 5 yrs.
The interest rate varies with plans, yet it is often in the neighborhood of the Prime Interest rate, or perhaps the Prime Interest rate + 1. I’ll use the latter, as it will result in a higher payment, so you can be prepared.
The repayment will be withdrawn automatically from your employer’s paycheck to you, each month, or perhaps each pay period.
PLEASE NOTE: If one leaves a job for any reason, with an outstanding 401(k) loan, it generally must be repaid within 60 days.
That said, the approximate monthly loan repayments for a $38,000 loan, using 4.25 (which is the current Prime Interest rate of 3.25 plus 1) for first a 1st time home purchase
would be $389.26/month, and $704.12/month for other than a first home purchase.
Good luck Kris!