All savings are tied up in 401k. What options are there?

Starting Out
11yFollow

All savings are tied up in 401k. What options are there?

Nick Edwards
Investor · Vienna, VA · Member since 2015 · 34 posts · 6 votes

Hi all,

I have a decent amount of money saved in my retirement. I am looking to finance my first owner occupied house. I will get settled in it and immediately pursue other opportunities while I house-hack. My question is: Will I be able to use that money or borrow on it for a non owner occupied property? Will I be able to use it for ANYTHING while I am living in the residence I first purchased? Might I want to search for and attempt to swing Subject to opportunities?

Thanks!

-Nick

0Reply
55 views

Most Popular Reply

Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
11y

@Nick Edwards, a potential downside to borrowing from a 401(k) is that if your job changes - you quit or get fired - you have to pay back the loan in full within 60 days or you are hit with early withdrawal penalties and are taxed at your current tax rate.

[email protected]Podcast Guest on Show #261
BiggerPockets
3Reply
See this reply in the discussion

16 Replies

Jump to latestLatest
  • William MorganPro Member
    Fix & Flip or Hold · San Luis Obispo, CA · Member since 2012 · 136 posts · 63 votes
    11y

    @Nick Edwards

    "Will I be able to use that money or borrow on it for a non owner occupied property?"

    Yes - well most likely.  I do not know your plans specifics but I suspect you can.  Typically you can borrow 1/2 of the value of your 401k up to $50k max.

    Let's assume you have over $100,000 in you 401k. If you are borrowing to purchase a primary residence you should be able to borrow $50k and have it amortized over 15 years. You will be paying it back at a moderate interest rate that you pay to yourself. You pay it back with after-taxed money (like any other loan). The only difference is that your 401k account keeps the added interest, not a bank.

    If you want to borrow for any other reason you can still borrow $50k.  The only difference is that it is amortized over only 5 years - i.e. higher monthly payments.

    "Might I want to search for and attempt to swing Subject to opportunities?"

    That's never a bad idea. But it's not your only option.  

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    11y

    @Nick Edwards, a potential downside to borrowing from a 401(k) is that if your job changes - you quit or get fired - you have to pay back the loan in full within 60 days or you are hit with early withdrawal penalties and are taxed at your current tax rate.

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    3Reply
  • Nick Edwards
    OP
    Investor · Vienna, VA · Member since 2015 · 34 posts · 6 votes
    11y
    Originally posted by @William Morgan:

    @Nick Edwards

    "Will I be able to use that money or borrow on it for a non owner occupied property?"

    Yes - well most likely.  I do not know your plans specifics but I suspect you can.  Typically you can borrow 1/2 of the value of your 401k up to $50k max.

    Let's assume you have over $100,000 in you 401k. If you are borrowing to purchase a primary residence you should be able to borrow $50k and have it amortized over 15 years. You will be paying it back at a moderate interest rate that you pay to yourself. You pay it back with after-taxed money (like any other loan). The only difference is that your 401k account keeps the added interest, not a bank.

    If you want to borrow for any other reason you can still borrow $50k.  The only difference is that it is amortized over only 5 years - i.e. higher monthly payments.

    "Might I want to search for and attempt to swing Subject to opportunities?"

    That's never a bad idea. But it's not your only option.  

    Very helpful! Thank you! I plan on buying a house. Getting people renting from me in an attempt to cover the mortgage and then focus on a live-in flip that a friend of mine will be living in, paying rent and helping with. No terms have been made as to what each of us would potentially get from it. I'm just attempting to figure out the financing part of it now. I have time now and cannot start until near the end of the year. Attempting to get ahead of the game and be a bit more prepared.

    0Reply
  • Nick Edwards
    OP
    Investor · Vienna, VA · Member since 2015 · 34 posts · 6 votes
    11y
    Originally posted by @Mindy Jensen:

    @Nick Edwards, a potential downside to borrowing from a 401(k) is that if your job changes - you quit or get fired - you have to pay back the loan in full within 60 days or you are hit with early withdrawal penalties and are taxed at your current tax rate.

    Thanks for the reply. I had no idea that was the case. The money is actually split between 3 different accounts. Most of it is in an account I had with an old employer (about 2+ years ago). Does that change anything?

    Thanks!

    0Reply
  • Nick Edwards
    OP
    Investor · Vienna, VA · Member since 2015 · 34 posts · 6 votes
    11y
    I really just want to be as aware as I can be to use my resources the best way I can with scalability in mind with the financing of this endeavor.
    0Reply
  • Hugh Ayles
    Cedar Park, TX · Member since 2015 · 377 posts · 200 votes
    11y

    Look into moving money into a self-directed IRA. I do not know much about these, but they seem like a good way to invest some of your retirement money.

    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    11y

    Definitely see if you can move the money from old employers into a self directed IRA for a better return and more control. I am not sure what your options would be off of that money in an IRA.

    If the bulk of the money is in your current 401k then make sure it has loan provisions and find out what they are. Not all 401k's have loan provisions. If they do and you can get a home loan from them that may be the best option for getting your money.  I do not think the 401k's that have a home loan provision can ask for immediate payback on the home loan  if you change jobs. For the additional 50k that you can borrow for any purpose I don't believe you can do that if you already have a home loan. Those loans up to 50 k may require immediate payback if you change jobs but not always.  Once you had a loan with my 401k you could see what you were allowed borrow as you paid back. It was not 1;1 but you could see the amount you could borrow every time you logged in.    The only other way to access that money is a withdrawl and that isn't worth it most of the time.

    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    11y
    Originally posted by @Nick Edwards:
    Originally posted by @Mindy Jensen:

    @Nick Edwards, a potential downside to borrowing from a 401(k) is that if your job changes - you quit or get fired - you have to pay back the loan in full within 60 days or you are hit with early withdrawal penalties and are taxed at your current tax rate.

    Thanks for the reply. I had no idea that was the case. The money is actually split between 3 different accounts. Most of it is in an account I had with an old employer (about 2+ years ago). Does that change anything?

    Thanks!

     You can only borrow against a 401k account held at a current employer.  And not all employer's allow it, so check with either your HR department or your plan administrator.

    If you've got funds with another employer, you could consider either rolling them over to your current employer's fund, which will then allow you to borrow against it or rolling them over into a Self Directed IRA. You should do some research on SD IRA's both here on Bigger Pockets and elsewhere on the web for a full understanding of them before you move in that direction.

    Podcast Guest on Show #244
    1Reply
  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    11y

    @Nick Edwards

    Following IRS website explains the 401k participant loan rules. 

    http://www.irs.gov/Retirement-Plans/Retirement-Pla...

    0Reply
  • Nick Edwards
    OP
    Investor · Vienna, VA · Member since 2015 · 34 posts · 6 votes
    11y

    I have looked at SD IRA's a bit and I believe that might be a route I will end up taking. I'm just attempting to get all options laid out in front of me. I appreciate all the feedback.

    Mark - I will be looking at that once I finish this message. Thank you!

    0Reply
  • Bryan O.
    Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    @Nick Edwards

    Before you jump into a SDIRA, you I would recommend that you look into a Self-Trusteed 401k. You have the same or more control and you retain the higher contribution limits that 401k's are great for.

    SDIRA is a more simple method, but depending on what you want to do in the future it may not be the best way forward.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    11y
    Originally posted by @Bryan O.:

    @Nick Edwards

    Before you jump into a SDIRA, you I would recommend that you look into a Self-Trusteed 401k. You have the same or more control and you retain the higher contribution limits that 401k's are great for.

    Bryan, self-directed Solo 401k plans that client controls as a trustee are more advantageous compared to a Solo 401k but one must be self-employed or own a small business without full time common law employer in order to create such a plan. 

    0Reply
  • Bryan O.
    Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    11y
    Originally posted by @Dmitriy Fomichenko:

    ...but one must be self-employed or own a small business without full time common law employer in order to create such a plan. 

    Can you elaborate on that? I have a W-2 job with a 401k through them, but I also own my own company and have opened a 401k/profit sharing plan with it and transferred my old 401k money into it. I am aware that I have to be cautious of total contributions between both plans. It sounds like you are saying that I should not have been allowed to open my plan?

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    11y
    Originally posted by @Bryan O.:
    Originally posted by @Dmitriy Fomichenko:

    ...but one must be self-employed or own a small business without full time common law employer in order to create such a plan. 

    Can you elaborate on that? I have a W-2 job with a 401k through them, but I also own my own company and have opened a 401k/profit sharing plan with it and transferred my old 401k money into it. I am aware that I have to be cautious of total contributions between both plans. It sounds like you are saying that I should not have been allowed to open my plan?

    Bryan - you are fine. As long as your own company does not have any employers it can have a Solo 401k/Profit Sharing plan. These plans are designed for business owners and their spouses and can not incorporate employees other than the owners. 

    0Reply
  • Bryan O.
    Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    Gotcha! You had me sweating for a second that I did something wrong. @Nick Edwards depending on where you live you can create an LLC for as little as $1 (I've seen Colorado have them on "sale"). If you planned to create an entity anyway it might be worth it.

    Just another option... Do what fits your tolerance for time, cost, and future growth.

    0Reply
  • Nick Edwards
    OP
    Investor · Vienna, VA · Member since 2015 · 34 posts · 6 votes
    11y

    All vey solid information. Thank you all for your responses. Let me look into it a bit more with this new knowledge and I will reply with my decision or further questions. Very helpful!

    Thanks,

    Nick

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free