Borrowing money from 401k

[TJ Quinata]

I’m thinking about borrowing 20k from my 401k to get started. Is this a smart idea?

[George Blower]

@TJ Quinata

Regarding taking a 401k loan:

• You would have to confirm that your 401k plan allows for a 401k participant loan (and that you have not had an outstanding loan in the last 12 months).
• If yes, you can borrow up to 50% of the balance not to exceed $50,000.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence). There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan. Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).
• If you are self-employed with no full-time employees & you can rollover the funds, you could set up a Solo 401k, rollover the funds and take a 401k loan from the Solo 401k.