401K used as downpayment?

Question

What would you all advise as far as taking money out of a 401K to use as a down payment for our first rental property?  I know 401K's are not popular but I have two different ones, which I know I would pay a small penalty but I would not be emptying it completely.

Albert Bui · Answer

Its quite simple really you take it out you have to pay it back. If you leave your job before you pay it back you might have the out standing loan at that time as a distribution which means you might encounter a higher income taxes that year plus 10% penalty if you're under 59.5 yrs. The question is are you going to work at your current job forever? If not consider it carefully.

From a financial perspective if you borrow against the 401k your funds that would be in the market at the mercy of stocks/bonds/mutual funds may lose opportunity cost of greater gains so you'll have to have an inner dialogue with yourself about your own financial strategy. If you dont know of one then you can find a financial advisor or read a couple of books to help formulate one on your own.

401k is not like real estate where when you take a loan against real estate the market value is the same.

On a 401k if you take a loan from it you will dimish the value of your 401k by the amount of the loan. So if you have 100k and take a 50k loan you now have 50k working in the market and not 100k while with real estate if you had a 100k home and you take a 50k loan against the home you'd still have the 100k home thats fully participating in the RE market, but a lien against the home for 50k as well. This makes real estate more advantageous to leverage because you can be participating in two areas at once. There are of course pros and con's of extreme leverage too =/.

Hope that helps but those are some basic implications of obtaining the 50k loan from compliance, to finance, to opportunity cost, etc

Jeff Astor · Answer

You can use the money from the previous employer and set up a self-directed IRA (or SD 401k, if you have some form of self-employment income). There are rules, but they may not be as complex as you think.

Bob E. · Answer

If you have left the company you could move the money to a Self Directed IRA but you have the be very careful not to mix with other funds of yours and if you don't have cash for a full purchase then finding a lender will be more of a challenge.

Jason Boyer · Answer

I have two different 401K's but with the same provider.  One is an employer contribution account and the other is a rollover from a previous employer.  They build separate, but are basically set up the same.

Albert Bui · Answer

I think you meant you "can use it as a loan right?" yes you can. Your 401k provider, whomever they are whether Fidelity, Vanguard, nationwide, prudential, etc, etc will draft up a note you will sign/date that says you will pay back your 401k at XXXX dollars per month that will be automatically taken out of your checks for XX months. This is how it usually works. Typical rate min's required by IRS is 1+ prime rate = 4.25% (not always but often).

Jason Boyer · Answer

Thank you. I will defiantly look into it.

Jason Boyer · Answer

So instead of taking the money out completely, you can use it for a loan?

Cal C. · Answer

If you close your 401k you are going to owe your state and federal tax rate on the withdrawn amount plus a 10% penalty.  So it woul be the same as borrowing  at 30-50% interest.

Albert Bui · Answer

There is no penalty that I know of to take out a 401k loan, perhaps you are referring to a distribution?

Some companies have an admin fee of 15-25 dollars administration costs to process the 401k loan but that is an after thought when considering to borrow thousands from your 401k.

401K used as downpayment?

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