Loan with 401k as collateral?

Question

Joe Villeneuve · Answer

Stop right there.  Go no further.

Think about what you want to do....and Don't do it! .  Even if you could, why on earth would you even consider risking your retirement account by using it as collateral on a lienable situation?

Now, having said that, I'm not saying don't use the 401k...just don't use it as collateral.  Here's how:

Write a loan from your 401k to yourself, then use the funds on the property.  You are responsible for the loan, to yourself (kind of yourself), but you are not putting your 401k in the hands of another person.  Make it a business loan to your LLC, and have the LLC buy the property.  Have the LLC pay back the loan in installments with interest (guess who gets the benefit of that interest money) to the 401k.  Don't pay it all back when you flip the property...just keep making the instalment payments.

Re-use the funds over and over.  One cost...multiple use of funds.  Cost of loan (interest) goes to you (well, your retirement fund).  Note that you can't do this with a SDIRA...writing the loan to yourself, but you can write a loan to someone else (not directly related to you).  401k's are different than SDIRA's, even though they are both retirement accounts.

This is where I mention I'm not a lawyer or CPA, and I'm not giving professional advice...so go to them to get the details.

Christopher Phillips · Answer

@Tim Wong

No. That's not allowed for 401K nor for an IRA. IRS would treat it as if you did a full disbursement of your retirement fund.

You can receive a plan loan or a withdrawal (with tax and penalties depending on the reason).

AJ S. · Answer

Yes, the limit on most 401k accounts is 50K (loan), you could cash out if really desperate, but you would pay taxes on early withdrawn.  Getting a loan on investment properties is really headache, also check HELOC or equity from any asset you may have and use as collateral.

Loan with 401k as collateral?

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