Should I borrow from 401K

[Fe Kelly]

So my husband and I have little chunk of money in our 401k as well as some money saved. We plan to house hack our first purchase with the BRRRR method. Should we borrow from our 401k to make up the rest of the down payment? We are sooooo over renting and need to purchase when the lease is up. I've never touched that money but from what I understand there are penalties. Any advice would be great.

[Dmitriy Fomichenko]

@Alex Maldonado I think you are confused between the 401k loan and 401k investment.

Whether self directed or not, 401k loan is tax-free and penalty-free, as long as you keep up with the payments. If you fail to pay back the loan on time, the unpaid amount will be considered distributions, and taxes will apply. If you are younger than 59 1/2, it is an early withdrawal and the penalty will apply. This is regardless of the type of account, ie. self directed or not.

The difference here, is that a self directed account may allow you to invest in real estate. But, as you say, unlike with the loan, any income from the investment property should go back to the 401k. Plus, as the plan owner, you wouldn't be able to live in the house, or benefit from it in any other way. For example, you cannot use the 401k money to invest in the house and then rent it to your husband or your daughter. In this case, that would not work for @Fe Kelly , since she plans to live in the house.