Borrowing money from 401k

4 Replies

@TJ Quinata

Short answer ........NO!!!!!!

You'll lose your tax exemptions for the 201 cash as well as incurring penalties! Unless this is going to be your primary residence, and is your first purchase, looting your retirement fund for real estate investment is a very bad idea.

Get a second job, look to creative financing, even halt your 201 investments to build up your down payment. But if you drain your 201 I think you'll regret it later.

@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.

@TJ Quinata

You'll likely receive varying opinions about this. Some will say that amount is not enough to get started. Others will likely advise on the risk of borrowing from your employer's plan. 

On the flip side of things, there are real estate investors that will advocate for completely distributing retirement funds regardless of the taxes and penalties involved so that you can get started in RE.

If you're likely to stay with the employer until you are able to repay the loan and are reasonably sure that you can get good performance with your investments, the loan might not be the worst option. However, that plan is not without risk, especially for a beginning investor.