Borrowinf against retirement fund to pay cash, then refinance?

Question

Looking for advice... we are considering borrowing against our deferred compensation retirement account to pay cash for a property. Can we renovate it and then take out a mortgage to pull the money back out? Has anyone done this in NY state? We wouldn’t have to wait 6 months to take the mortgage, correct?

Kevin Sobilo · Answer

@Alison Rauch, I have also done this and I think its a fine and reasonable thing to do in many cases.

I would consider a few things before doing it. First, is it a very significant part of your retirement savings? Taking a $50k loan from your 401k isn't a huge deal if you have $250k in it, but it might be something to think harder about if you only have $100k in it.

Also, consider your job security. If you lose your job before you repay this money it would likely be considered a distribution and then you probably have to pay income tax and a 10% penalty on it.

If you do take a loan from your 401k type account, investigate the repayment rules. For example, if I took a $50k loan one day and paid it back the next day, I would not be eligible to take out $50k again for a whole year. The amount I can take at any given time is $50k minus the highest loan balance I had during the last year.  So, if you have rules like that you may wish to not repay the money right away (over time instead) and keep it working for you with more real estate investments.

Frank S. · Answer

Read about delayed financing.  No need to wait 6 months.