401K loan

46 Replies

I plan on calling my 401K company first thing Monday morning, but I was wondering if anyone on here had any experience with 401K loans? There is a property for sale in my neighborhood, 3 bed, 2 bath, 1000 sq ft for 30K. It is a short sale. Can I get a loan BEFORE I make an offer or what would be the best route to go?

I've done it for a down payment on a property. I'd wait until I had a contract on the property to get the loan, but make sure you can before hand.

I've used loans from 401K as well. Depending on your employer, you may be able to take out a generic loan without having to specify a property (usually on a shorter time frame).

The payout for the loan should be much quicker than the loan closing IF you do get the property, so if that is the only way you're getting the loan, I'd wait until you have the property under contract.

Yes just be sure you get the process started ahead of time. For me it took almost a month to get the money in my account. This might have just been the employer as they had never had anyone request a 401(k) loan before.

I will go with you may want to consider taking the loan out early. If you don't already have the cash needed without the loan, then you can't submit as a cash offer with proof of funds until you get the money out of your 401K. This might not be a problem if you can write something like "proof of funds will be provided within XX days of contract acceptance" but that might not work. I'd ask the agent what they thought of an offer with a clause like that in there.

I know for the SS I bought recently I was asked for POF twice prior to contract acceptance because as the bank was processing everything they wanted to verify I still had a valid cash POF at the end of the month.

The security for your loan is your assets in the plan. If a 401(k) loan permits loans, the administrator doesn't normally care what you're going to do with the money. They care about following the plan rules and DOL regulations.

So, I'm pretty sure that there is a difference between a distribution for a house (which does not need to be repaid, for your primary residence) and a loan.

A loan can typically be made for 50% of your account or 50k - whichever is less. I think loans are on a 5-year balloon with no monthly payments. There are typically fees. The biggest catch: if you leave your job for any reason, the loan is due immediately in full.

In either situation, getting the money into your account takes several steps (sell stock, request loan, approved loan, money transfers.

Or - i could be wrong. Your HR dept could say for sure.

I've done two 401k loans for down payments and rehab. In my case, it was a matter of filling out an online form and I had the funds within three days. Limits were $50k and 5 years for any purpose not involving your primary residence. Interest is not deductible as an expense or reportable as income since you are paying yourself. Proof of funds would be the balance of your 401k and a copy of the loan terms.

The details will depend on your employer's plan. I've never had any employer that didn't require monthly payments, deducted from your paychecks. Usually this is a fully amortized loan with a max term of five years, unless its to buy a primary residence. Employers have limits on the number of loans you can have out. Total loans can be $50K or 50% of your account balance, whichever is less. Some, though not all, do require you to immediately repay the loan if you leave their employment. If you don't, it will be considered a distribution and subject to taxes and penalties.

Originally posted by @Phil G. :
The security for your loan is your assets in the plan. If a 401(k) loan permits loans, the administrator doesn't normally care what you're going to do with the money. They care about following the plan rules and DOL regulations.

@Phil Glantz ,


That is not correct. There is no security for the 401k loan as you are borrowing from yourself. If you do not pay it back it is treated as a taxable distribution.

To add to @Jon Holdman 's comment it will become due upon termination; you may be able to arrange payment terms over a specified period of time.

Is there not a 10% penalty for using these funds for a non-primary residence?

If you take a distribution and you're under the minimum age to take a distribution, yes, there is a 10% penalty in addition to taxes.

If you take a loan, there's no penalty to using the money for whatever you want. They only want to know if its for a primary residence. That may allow a 10 year amoritzation period. If not, its a max of five years.

Originally posted by Jon Holdman:If you take a loan, there's no penalty to using the money for whatever you want. They only want to know if its for a primary residence. That may allow a 10 year amoritzation period. If not, its a max of five years.

I was under the understanding that a loan for a primary residence was 15 years.

my 401k I can borrow half my balance and have up to 2 loans out at one time. They offer general purpose loans so no need to prove what its for or anything. Only penalty is "loss of compounding interests" but if I pull 30% COC then I guess I can live with missing out on my 8% lol

@Bily Elliott I'm sure you got the answer by now, but I would be hesitant to pull out the money before I had bank approval on the short sale. This could take months. Depending on how far along the foreclosure proceedings are, what the appraiser says, and a host of other factors, you might not even get the deal.

My personal experience was that it took 4-5 days to get money from my 401K.

I've done 401k loans and just like many have said I was able to borrow lesser of 50% or 50k. I could choose a repayment timeframe from 12 to 60 months. Mine only charged a $75 fee to process. Repayment early is allowed but only after the first 12 months. Money in my account in 4 or 5 days.

Good time to pull money out! Just be sure you keep your regular 401k contributions going in addition to the repayments if you can swing it.

I too have used this strategy successfully many times. We finally got to the point where our passive income allowed my wife to quit her job. We took her 401K, created another LLC, and opened up a 401K plan for that LLC and transferred the 401K from the wife's company to our company. After the funds were in our new company, we then used the funds to buy another home.....Keep the velocity of the money going!

Originally posted by Charlie Miller:
I've done 401k loans and just like many have said I was able to borrow lesser of 50% or 50k. I could choose a repayment timeframe from 12 to 60 months. Mine only charged a $75 fee to process. Repayment early is allowed but only after the first 12 months. Money in my account in 4 or 5 days.

Good time to pull money out! Just be sure you keep your regular 401k contributions going in addition to the repayments if you can swing it.

You have to wait 12 months to repay the loan?

Originally posted by Jon Holdman:
The details will depend on your employer's plan. I've never had any employer that didn't require monthly payments, deducted from your paychecks. Usually this is a fully amortized loan with a max term of five years, unless its to buy a primary residence. Employers have limits on the number of loans you can have out. Total loans can be $50K or 50% of your account balance, whichever is less. Some, though not all, do require you to immediately repay the loan if you leave their employment. If you don't, it will be considered a distribution and subject to taxes and penalties.

Am I correct in the following points:

1) If you take out a loan from your 401(k), and then leave your employer, you are required to pay that loan balance back in 60 days otherwise it counts as a distribution (subject to ordinary taxes) + you are subject to a 10% penalty for early withdrawal?

2) If you leave your employer and have a 401(k), you can transfer that 401(k) to a self-directed (solo) 401(k) through an LLC that you own?

3) The loan from the original 401(k) must be re-paid before transferring to a solo 401(k) otherwise the distribution + penalty applies?

4) If you have a solo 401(k) you can then take a loan from that?

Just want to update/answer some of the post/questions that I have seen on this. I AM inquiring about a loan, not a distribution. Like several people have said, up to 50% of the balance or 50K is the maximum that is allowed to be loaned against. I did not ask many, if any questions about if my employment is terminated because I work for my father and pretty much run his company, if I am no longer here he would have to start working again full time so my continued employment is as close to guaranteed and any job can be. This will NOT be for a primary residence, so the terms will be UP TO 60 months, at 2.5% interest on the note paid back to myself in weekly payments. I CAN pay the note off early AFTER 12 months. I can get a loan for several different things; college education, medical, several other things, and then there is a box to check for other and then it says to specify. When I spoke to the guy on the phone, he said an investment property is fine to use as the reason to get take out a loan. He said they process in less than 5 days usually, and we just had one done for a guy that works here so as soon as I decide I want to go ahead with it I am good to go.

There are a few OTHER properties that are foreclosures, not short sales, that have come on the market in the last few weeks in the area I already have a rental and that I want to stay in. My plan now is shortly after the new year I will take out a loan for 30K and make a cash offer or two on some of these properties that are listed in the 30K range. Hopefully I can get a GREAT deal on a property or two, get them rented out, then save up those rents and roll them into more properties. That is my plan anyway!

Originally posted by Dawn Anastasi:

Am I correct in the following points:

1) If you take out a loan from your 401(k), and then leave your employer, you are required to pay that loan balance back in 60 days otherwise it counts as a distribution (subject to ordinary taxes) + you are subject to a 10% penalty for early withdrawal?

2) If you leave your employer and have a 401(k), you can transfer that 401(k) to a self-directed (solo) 401(k) through an LLC that you own?

3) The loan from the original 401(k) must be re-paid before transferring to a solo 401(k) otherwise the distribution + penalty applies?

4) If you have a solo 401(k) you can then take a loan from that?

1) I left my company last year, and I was able to just continue paying it back based on the payment shedule, as long as I kept the company account open. I know that I could not transfer the loan to my new solo 401K. I honestly don't remember if I would have been able to move most of my 401k (keeping a small balance with my company) in order to keep the loan payments going. I just decided to pay it of as I did the transfer to my soloK.

2) With a SD401K, you do NOT have to have an LLC, as you do with the checkbook SDIRA. I would think that it would be fine to have one, just as you do with the checkbook SDIRA, for an additional layer of asset shielding if you have substantial equity in your SD401K.

3) My plan administrator, as I said, would not allow me to migrate a loan over to my new SD 401K. I WAS able to take out a new loan on my SD401K (I had already set up my SD401K with other rollover IRA funds) and COULD have used those loan proceeds to pay off the company 401K loan prior to transferring it over, if that makes sense. Maybe your company 401K would (upon termination of employment) allow you to transfer part of the funds, then you could take a new loan in the SD401K, pay off the old 401K loan, and then transfer the rest of the old 401K balance.

4) Absolutely! It works just like a company 401K. Now, if you create two related small businesses and divide your company 401k funds between two new SD401K's in order to try and get $100K of loans ($50K from each), then you are on very thin ice with the IRS at that point, per my administrator. Believe me, this thought occurred to me almost immediately, so purge that thought from your head!

I just requested my 401k loan last night. Unfortunately for me I am needing to pull the funds for paying debts, but after that I will have about $10k left so I am thinking of using it on an investment property....a cheap one....like in my hometown of Buffalo.

For me it was straight forward. I didn't even have to specify what it was going to be used for, and it had the same terms as if I pulled a loan for a property. It said I should have a check in 3 business days.

Originally posted by David Beard:
1) I left my company last year, and I was able to just continue paying it back based on the payment shedule, as long as I kept the company account open. I know that I could not transfer the loan to my new solo 401K. I honestly don't remember if I would have been able to move most of my 401k (keeping a small balance with my company) in order to keep the loan payments going. I just decided to pay it of as I did the transfer to my soloK.

Do all 401(k) plans allow this, or is this based on a plan-by-plan basis? When I read over my paperwork it seemed to indicate that if I left the company I had to pay back the loan within 60 days.

I wasn't thinking of opening 2 SD 401(k) accounts. What I was wondering if you had a 401(k) loan and left the company, and they required you to pay it back in 60 days, could you pay it back in those 60 days, then transfer the funds to a SD 401(k), then take out another loan?

@Dawn A. - absolutely you can do that. I did it (after consulting with the administrator). My administrator also did the loan paperwork at no additional cost, which I thought was a great perk (mysolo401k.net). It's up to me to make the quarterly payments.

@Dawn A. - I do think it's plan/company specific, Dawn, I was just making the counterpoint since people oft post that the loan has to be paid back right away, and this is just not uniformly true.

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