Regrets or anything different after using 401(k) for purchase?

Question

Is there anyone here with some advice about using your 401(k) to purchase an investment property? Anything that you would do differently or just advice about how to handle it? I only have about 35k in it so it may be awhile but I thought I’d start researching it before it came time to use some of it.

George Blower · Answer

@Drew Lamb

Here are the general considerations regarding 401k loans.

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Please keep in mind the multiple loan rules:Under those rules, the sum of the balances of a participant's outstanding 401k loans under a single 401k plan (using the highest outstanding balance of each loan over the last 12 months) can't exceed 50% or $50,000 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.

David Martin · Answer

@Drew Lamb @Sam L. Take a quick read on self-directed 401k's/IRA's and it's rules and tax benefits and see if sheltering the buy in the account makes sense vs pulling the money for what you're trying to do. It's a pretty eye opening option that might be right or wrong for you depending on what you're planning.

starting point:

https://www.investopedia.com/retirement/doing-it-yourself-selfdirected-401k-and-ira/

starting point:

https://www.investopedia.com/retirement/doing-it-yourself-selfdirected-401k-and-ira/

Drew Lamb · Answer

@Nick Barlow that is what I’m thinking. To be able to use some that money now would be tremendous.

Nick Barlow · Answer

@Drew Lamb I have taken a 401(k) loan before, have no regrets, and would do it again. The biggest critique I feel like I’ve heard is that you’re using after tax dollars to repay pre tax dollars.

I felt fine doing that- accessing money now rather than 3 decades later, and the interest charge goes to me.

In my perspective, it’s another line to access capital.

Drew Lamb · Answer

@Anthony Gayden yes, if I plan to go forward I am definitely going to sit down with a fidelity advisor to go over everything. For the loan option how much did you take out and how much were your monthly payments?

Anthony Gayden · Answer

I have used a 401K loan three times to purchase investment properties. It worked out well.

On the other hand if you are talking about actually cashing out your 401K and paying the taxes (I believe the 10% penalty has been temporarily suspended), then that sounds like a terrible idea.

Drew Lamb · Answer

@Sam L. Definitely looks like a way to speed up the acquisition side of things. Since the stock market has bounced back and I’ve made a little back (as I switched to my stable growth bonds to large cap blend stocks near the bottom) I thought it might be time to look at using it for RE. Same thoughts as well on your end?

Sam L. · Answer

I'm in the same boat. I'm looking to take up to 50k out of mine for my next purchase. I've already talked to my company and "applied" through fidelity. It seems like a straight forward process, all I have to do is hit the summit button and the money will be in my account in a few business days. I just need to find my next deal.

Regrets or anything different after using 401(k) for purchase?

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