patrick.net

It's your savings so you should be able to do with it what you want. That said, it's obvious that this is just another attempt to re-inflate and support the artificial high real estate prices that big government policies created.

Sure, let people use 100% of their 401k toward their home purchase but stop with the non-sense loan guarantees and stop injecting trillions of debt into the system to support artificial low interest rates.

Don't buy an overpriced house in the first place. Move to an area where housing is reasonable. If you want to live in a third-world country with nice weather, there are plenty of them out there that are much cheaper than California.

I'm curious as to what it will do to your credit? You might be better off taking the loan after you get a mortgage. I also think there is a 60 day repayment or be charged a distribution clause that kicks in if you lose your job.

Whats your hurry? Most people think the market is going to be flat and interest rates steady for at least a year, time you could use to save more money.

I'm in a similar position. The IRS rule is 50% of your 401k or $50k, whichever is less. You then have (up to) 15 years to pay yourself back. In my case I plan to save $100k to borrow the maximum amount, save another $50k (actually much more) on the side, and have 20% down for a $500k house in Oakland or Berkeley. There are several houses that recently sold near us that we would consider buying, but they sold for around $800k so they will need to drop 37% for us to actually purchase instead of continue renting. I'm hoping this drop will occur within three years, right when our landlord indicated she will retire and sell her rental.

wthrfrk80 says

Don't buy an overpriced house in the first place. Move to an area where housing is reasonable. If you want to live in a third-world country with nice weather, there are plenty of them out there that are much cheaper than California.

Yes, but if you or your wife have a public sector job and are vested in their pension...there are limited options.

I would NOT borrow from 401K for a down payment on a house. EVER.

If you do this the whole system will then be working FOR you not against you. As in - the fed reserve prints money like mad to make sure Stocks + RE only go up. You need both to go up if you do this. If they both tank like march 2009 and stay there u are screwed - obviously they wont let that happen and did not let that happen.

rootvg says

Yes, but if you or your wife have a public sector job and are vested in their pension...there are limited options.

Yes that's a different situation there.

To the OP: are you "tied down" to California? Can you get a job somewhere else? It seems crazy to borrow from your 401k just to get some shelter. Yikes!

not smart; u r paying back 401k loan (denominated in pre-tax dollars) with after-tax dollars. you are losing 30% or so depending on ur bracket.

"Without losing cash on hand"? What do you mean? If you have the 20% down in CASH on hand, do NOT sell your retirement investments for this purpose.
Your retirement is why you are working and saving.
You should not concern yourself with the present gyrations of the stock market until you are 5 years away from needing ALL that money.
If you are 20 years plus away from retirement, FORGET what guys say about the stock market "risks". Your biggest risk is living beyond your money in old age.
Regardless of what some say, when interest rates are very low, stocks will do well. This is just like gravity, it's going to happen because some businesses tend to grow profits and their stocks tend to rise (e.g. Apple).
Save up the down and leave the 401K alone is the best approach.

Do the rules allow you to claim a deduction for the interest you are paying to yourself?

I agree with the comments as to not buying a house at an inflated price. However, I don't necessarily see borrowing from your 401k to be directly associated with that. If it makes financial sense for you to buy and that's what you need to do to make that happen, so be it.

Plenty of folks have money for a downpayment because they don't put *any* money away for retirement. If you've been a diligent retirement saver and the $50k isn't a huge percentage of your 401k, this might not be a bad option. It's probably a better option than keeping your 401k in cash accounts at 0.1% interest for the next few years.

Retirement plans are for retirement. If you need to tap your 401K for a home down payment you can't afford the house. Not to mention the cost of that money when you get hit with all the extras and we haven't even began to talk about maintenance, taxes and everything else that goes into owning a home. Save more money. You want your home to be a blessing to you, not a curse.

lurking says

Retirement plans are for retirement. If you need to tap your 401K for a home down payment you can't afford the house. Not to mention the cost of that money when you get hit with all the extras and we haven't even began to talk about maintenance, taxes and everything else that goes into owning a home. Save more money. You want your home to be a blessing to you, not a curse.

Before blowing 401K money on a down payment for a house, I'd relocate.

if you can't pay for a down payment with savings you can't afford the house.

keep saving.

if you actually use your 401k for a down payment you're probably poor because you have no understanding of personal finance.

Hysteresis says

if you can't pay for a down payment with savings you can't afford the house.

keep saving.

if you actually use your 401k for a down payment you're probably poor because you have no understanding of personal finance.

That's a bit harsh.

My sister and brother-in-law have done this several times without issue...but they're both government employees with union protection.

You can do it. It's just that I would not.

Hysteresis says

if you can't pay for a down payment with savings you can't afford the house.

keep saving.

if you actually use your 401k for a down payment you're probably poor because you have no understanding of personal finance.

Some people don't save for retirement and that's why they have savings for a down payment. I would argue the vast majority of people in America have no understanding of personal finance, which is why we had a housing bubble and so many foreclosures.

In a lot of locations, like California the housing market will never be truly affordable. So, you must make the determination of when housing prices will be affordable enough to enter the market. If the housing prices reach that mark and you have a great want for a home, because of a family then a 401 k loan can make sense. Some people have comment that you shouldn’t touch your 401K or may comment that you shouldn’t touch it unless you are able to make the loan payment and maximum annual payroll deduction. What may have been lost in these comments is that 401k loan is a loan to you. Depending on how the stock market is doing, you may in fact have a higher return by paying yourself back. However, make sure that you are able to afford your standard 401k deduction and the 401k loan repayment before you take the 401k loan.

Not sure if it has been mentioned yet, but in many 401k plans if you take a loan out against your 401k, you cannot make contributions until the loan is repaid. So if you are planning to pay the loan back over the course of a few years or more, you won't be able to contribute to your 401k. This increases your taxable income and absolutely kills your retirement savings progress.

DO NOT do this, it does not make sense on any level whatsoever. Your concern about the stock market being high at the moment is irrelevent. Compared to 30 years from now when you retire, it will not matter.

Rent4Ever says

Not sure if it has been mentioned yet, but in many 401k plans if you take a loan out against your 401k, you cannot make contributions until the loan is repaid. So if you are planning to pay the loan back over the course of a few years or more, you won't be able to contribute to your 401k. This increases your taxable income and absolutely kills your retirement savings progress.

DO NOT do this, it does not make sense on any level whatsoever. Your concern about the stock market being high at the moment is irrelevent. Compared to 30 years from now when you retire, it will not matter.

someone who is financially savvy. refreshing to read a post with useful information.

genesplitter says

I'm in a similar position. The IRS rule is 50% of your 401k or $50k, whichever is less. You then have (up to) 15 years to pay yourself back.

Or 90 days after you change jobs, which ever comes first.

If you can't pay yourself back within 90 days of that event you'll owe the governments income tax plus a 10% federal penalty on the distribution (> $20,000 on a $50K loan).

justwantaniceplacetostay says

Just thinking of ways to make the 20% down without losing cash on hand.

if you have the cash on hand like you said,
in that case you can pay off the loan if you lose (or leave) your job as long as if your plan lets you have a loan and still make max contribution.

Hysteresis says

if you can't pay for a down payment with savings you can't afford the house.

keep saving.

if you actually use your 401k for a down payment you're probably poor because you have no understanding of personal finance.

I have around 120K saved up and am looking in the 600K range if at all. If I put in all that, there will no emergency fund which is what I mean by cash on hand. Its not a dire situation just that I have gotten used to always having enough and not thinking about checking account balances while paying bills and dont want to start now.

My other option is to sell my options which I want to hold onto for the potential 30-40K upside over next few years if my company does as some analysts are predicting. I expect this upside to be outperform the market on average which is what my 401k follows.

So its not that I dont have it but I am looking at different methods and their tradeoffs.

rockyroad says

not smart; u r paying back 401k loan (denominated in pre-tax dollars) with after-tax dollars. you are losing 30% or so depending on ur bracket.

Trying to understand this. I thought I will continue to max out the $17K into the 401k as usual with pre tax. Apart from this I got an amount X from a financier (in this case myself) and am going to pay it back X+interest but I pay back the interest to myself. So the downside is the potential gain the X dollars would have had if it remained in the 401k.

I am not worried about replenishing 401k in the long term since I always do the max 17K+5k match + 5K traditional IRA.

Hysteresis says

Rent4Ever says

Not sure if it has been mentioned yet, but in many 401k plans if you take a loan out against your 401k, you cannot make contributions until the loan is repaid. So if you are planning to pay the loan back over the course of a few years or more, you won't be able to contribute to your 401k. This increases your taxable income and absolutely kills your retirement savings progress.

DO NOT do this, it does not make sense on any level whatsoever. Your concern about the stock market being high at the moment is irrelevent. Compared to 30 years from now when you retire, it will not matter.

This is statement is false. I currently have a 401k loan and I continue to contribute 6% with the company match. My retirement plan handles loans and contributions are handle separately.

ok I get rockyroad's points now. There is a double taxation issue with this. Also I am pretty sure you can make contributions AND pay back the loan. If loan made contributions impossible then this method is dead on arrival.

From a blog post of 401k loan: Double Taxation

If you recall, your retirement plan contributions are made on a pre-tax basis. This means that you realize a tax break when making contributions to the plan, and you’re then taxed in the future when you take money out of the plan. Unfortunately, when you take a loan from your plan, you may be subjecting yourself to additional taxes.

While regular 401(k) contributions are taken out of your paycheck on a pre-tax basis, the loan repayments are not. This means that you are taking pre-tax money out of your account and then repaying it with after-tax money. This can result in some of this money being taxed twice.

I would definitely do it - I'm not a huge fan of 401K's as I have concerns about whether my 401k is even going to be there when I retire or if it will be forced into purchasing government treasuries with annuity payout only. True you are paying taxes twice on the interest but are not taxed on the money when you take the loan. Personally I would do a hardship withdrawal to buy a primary residence. I no longer contribute to my 401k and instead take that money and pay extra on my mortgage. When I retire my house will be paid for which is my biggest expense.

Here's my 2 cents but ultimately you will have to make the decision, not us. I think others have already made the case that using a 401k to buy a house is probably not exactly the best thing to do. I'd echo the sentiment and repeat that if you're even thinking about this then perhaps you're not financially prepared to buy a house to start with.

Let's look at it another way. Basically the often repeated numbers these days are that if you were to retire by the age of 60 and live to be 100 ( not unthinkable) then you would need to have saved up the equivalent of $1 million dollars in order to have a yearly annual income of $40,000, not including social security-assuming it'll still be around. $40,000 isn't much. In a major expensive metro like the Bay Area, you'll need to have more like $2 million. That sounds like a lot but it all depends on how much has been invested into retirement funds and how long you have left for those funds to do their work via compounding.

So for example let's say that you have $120,000 saved up total for retirement and you didn't add anymore money to that for the next 30 years. Compounded using the historical percentage of return you could expect from the stock market, which for the past 100 years has been between 7-10%, plopping in a conservative rate of 8% would give you a total of $1,200,000. The important takeaway from all of this is that it isn't necessarily the annual percentage of return which at a glance seems unimpressive, but rather the effects of compounding over time. That initial $120,000 investment basically went up in value 10-fold.

So- let's say all of that $120,000 is taken out of retirement and stuck into a house instead. Suddenly your retirement account is reset to zero both in terms of the amount invested and the time left to compound. With no money and less time for compounding, a significantly larger amount of money will have to be saved, and done so much faster in order to have even a hope of reaching the end goal for retirement.

Anyway, its your choice.

* NOT financial advice.

I've seen people take a loan against 401k to pay off credit cards because their credit cards charged 20% interest, and 401k only charged 2%. So it was nobrainer.

It doesn't make too much sense to do it for a house down payment. You can always take it out. And with low interest rates out there anyway, you aren't saving yourself anything. You are better off keeping it in the 401k.

edvard2 says

Let's look at it another way. Basically the often repeated numbers these days are that if you were to retire by the age of 60 and live to be 100 ( not unthinkable) then you would need to have saved up the equivalent of $1 million dollars in order to have a yearly annual income of $40,000, not including social security-assuming it'll still be around. $40,000 isn't much. In a major expensive metro like the Bay Area, you'll need to have more like $2 million.

I had always assumed the majority of the elderly moved out of Cali to a cheaper area.

Keep your 401k and wait until buying a house is not such a stress on you financially. But a house because you want a house and can afford it. Don't buy it expecting to get wealthy because of future appreciation. Be okay if the house drops another 20% or so in the next few years because you don't have any plans to sell anyway. You are buying an asset (wood, concrete, nails, etc.). Don't lose your real investment edge in the 401k because you are not willing to wait. Patience right now is the game. Prices have been falling, are still falling. Don't believe the crap hype that realtors post here and all over the papers. They are lying, they are exaggerating, they want your money. It is that simple. It is your money and don't part with it under false pretenses. Only trust yourself and do your own research. Don't believe anyone that will make money from your decision.

Hysteresis says

Rent4Ever says

Not sure if it has been mentioned yet, but in many 401k plans if you take a loan out against your 401k, you cannot make contributions until the loan is repaid. So if you are planning to pay the loan back over the course of a few years or more, you won't be able to contribute to your 401k. This increases your taxable income and absolutely kills your retirement savings progress.

DO NOT do this, it does not make sense on any level whatsoever. Your concern about the stock market being high at the moment is irrelevent. Compared to 30 years from now when you retire, it will not matter.

someone who is financially savvy. refreshing to read a post with useful information.

The biggest negative to taking out a loan from your 401k is that in the case you lose your job with your employer (it happens to the best), then you have 60 or 90 days in most plans to repay the full balance owed on the loan. If you cannot (which you will not be able to because it is in the home), then it will be treated as an early withdrawal and charged the 10% penalty fee, plus it becomes part of your income and you pay taxes. Now, you just cornered yourself. A job lose would mean you become financially bankrupt. Not a good situation.

If the predictions for another downturn are valid (just saying if here). Your house value could suffer, you could lose your job. Throw them both on top of the tie in with the 401k loan and things just got a whole lot worse. If the economy is turning around and your job goes perfect, then you may benefit from housing appreciation at some point. Just understand this thing can go either way. The best economist in our country didn't see the last downturn coming and even joked about how leveraged this country was. No one really knows for sure, what the future holds, but I always think it is best to play out both scenarios and make sure you can survive and stay happy. ;)

StoutFiles says

I had always assumed the majority of the elderly moved out of Cali to a cheaper area.

You know what they say about "assuming"...

justwantaniceplacetostay says

I have around 120K saved up and am looking in the 600K range if at all. If I put in all that, there will no emergency fund which is what I mean by cash on hand.

do more research.

i did about 10 minutes of reading and your idea is dumb since you're going to incur taxes and penalty fees on the 401k distribution when there's no need for this.

if you did even a little research (and actually understood the 401k distribution rules and how they apply in your situation), you'd reconstitute your strategy, saving yourself tens of thousands of dollars by not having to pay the government unnecessarily. you'd also eliminate many other very significant risks that have been mentioned in this thread.

you're one of those folks that's trying to optimize and trying to be clever. except since you're not clever, there's a possibility you'll end up screwing yourself badly. be careful - do more research before moving forward since there are large consequences with what you are planning.

There r lot of people doing this. Couple of notes
1. Read your employer 401k loan docs
1. Check for max eligibility per plan
2. Pay back terms in case u switch or loose job
3. Most of them allows paying from a checking ac
4. As u mentioned it is best to loan when market is high and payback when down

I took a loan from my plan and my wife's plan
And we paid it back in 2 yrs
Worked out very well

Hysteresis says

do more research.

Uh, you need to do a little more research. There are no penalty fees on a 401K loan.

Lose the attitude--especially when you don't know what you are talking about.

tatupu70 says

Hysteresis says

do more research.

Uh, you need to do a little more research. There are no penalty fees on a 401K loan.

Lose the attitude--especially when you don't know what you are talking about.

at least i don't argue with spambots. you'd have to be a total retarded to do that.

justwantaniceplacetostay says

I have around 120K saved up and am looking in the 600K range if at all. If I put in all that, there will no emergency fund which is what I mean by cash on hand. Its not a dire situation just that I have gotten used to always having enough and not thinking about checking account balances while paying bills and dont want to start now.

For 600+k house, I won't touch it if i don't have 200k cash or 150k + ur 50 k 401k. Personally, taking out 401 k loan is okay, the sticking point is the need to pay back immeditely with a job change. And, ur cash is tight as u haven't factored closing cost, remodeling etc.

My husband took small loan from 401k for his MBA to ease cash flow then. So, I don't think it is a bad idea if u are prepared for other changes.

Hysteresis says

at least i don't argue with spambots. you'd have to be a total retarded to do that.

Mr. Fantastic? Is that you? I've missed you!

genesplitter says

I'm in a similar position. The IRS rule is 50% of your 401k or $50k, whichever is less. You then have (up to) 15 years to pay yourself back.

There is another rule: if you change/loose your job you have to repay the whole loan practically immediately. I don't remember the exact time period, but it's 60 or 90 days. Otherwise it's considered an early withdrawal and you pay your max taxes + penalty. (All taken from your 401k).

As a matter of fact, when I think about a possibility to buy a house I definitely plan to take such a loan, with one limit: it should be below the net pay in my estimated severance package, which in my case, including also the unused vacation time should be above $50K after taxes.

justwantaniceplacetostay says

While regular 401(k) contributions are taken out of your paycheck on a pre-tax basis, the loan repayments are not. This means that you are taking pre-tax money out of your account and then repaying it with after-tax money. This can result in some of this money being taxed twice.

You forgot one thing. When you take a loan from your 401k you take it out of your pre-tax money and use it as after-tax money. The only thing that is double-taxed is the interest.

ddavis mentioned that our retirement may not even BE there when we need it, and I've thought of that, too. As long as we buy when prices are affordable I don't know that it's worth fretting about the relatively minor ups and downs of prices unless we are planning or needing to sell. Moving frequently makes homeownership a bad idea. But if you are able to stay put, the main thing is, buy what you can afford of course, and buy it the cheapest safest way possible. For those who have enough in their retirement to take some out, I don't think it's a bad idea to put that money into their shelter so they can buy when prices are low and get it paid off quicker, (thus paying less interest to the banks over the life of a typical mortgage).

With all the corruption and instability in this country I really have very little faith that retirement funds are safe and can be counted on. So, I've also been thinking it might be a better use of at least some of that money to buy an affordable house for cash or at least make the down pmt with it. I also plan on installing solar if I buy, as utilities are another drain on the budget. If I REALLY thought our retirement funds were going to be there, i would not be considering this as seriously.

And, what if you just use part of your retirement savings and do not take it out as a loan? Am I missing something? Sure you may pay taxes on it, (that's the penalty part, I get that), but a house IS our biggest single expense and getting to retirement age with a paid off house could be a life saver, financially.

(BTW by 'relatively minor ups and downs in prices' I am talking about truly minor stuff, not drops of another 20% or more. In some markets prices are pretty realistic again. If I buy at those prices and it loses a little more yet, I'm not worried. I am worried about a major drop only if it's still worth nothing in 20 yrs. Then we'd be talking about this really being a 3rd world country but at least we'd have a place to live I guess.)

CSC says

With all the corruption and instability in this country I really have very little faith that retirement funds are safe and can be counted on. So, I've also been thinking it might be a better use of at least some of that money to buy an affordable house for cash or at least make the down pmt with it.

There has always been corruption and instability. Making a guess is simply guessing. The market has performed the same for the past 100+ years long term. Buying a house doesn't really add any additional security.