Leveraging Employer 401k Loan

[Tony Tran]

Assuming the employer matches 100% of the amount contributed. Knowing that a traditional tax-deferred 401k allows me to borrow up to half of investment dollars (that inclusive of company match funds), or up to $50k, as a loan. I can just “borrow” all the initially invested pre-tax dollars at a very low interest rate over the next 5 years and use it to purchase real property now.

The benefits are:
- Low interest rate (fixed).
- Your “actual” money earn before tax can be used. Means more money to invest with and compound long-term.
- Buy property now rather than later.
- All loan payments including interest goes straight back to the 401k. Pretty much paying yourself back.

The downsides are:
- Loan payments must be paid with “after tax” dollars.
- There is usually a trustee processing fee. Mine is $50.
- Must have money to pay leveraged 401k loan back.
- If you terminate with your employer, the trustee may ask for the whole loan to be paid back right away.

Just a reminder, this is not a legal or tax advice, or of such.

Any thoughts? Risky?

[Bryan H.]

I took a loan out against my 401k for a flip. The duration was less than 12 months and the money was back in the account. I felt my flip would (and it did) get me a much better ROI than leaving it in the account.

A couple of things to think about. You DONT need to pay it back if you leave your employer. If you don't, its considered a distribution and you get hit with the penalties and taxes. That may suck, but you don't need to pay it back.

In regards to returning the money after taxes. If I lowered my contribution to only what my employer matches and waited until I saved up (after tax dollars) to do the flip, I would have missed out on an opportunity. It was worth it to me to take the fast cash, use it and return it when I was done. Now I have paid back my 401k and I have an influx of dollars to use on future projects that I wouldn't have if I didn't borrow against it.

So, depending on your situation, it may be a good idea. I wouldn't use it for long term projects, but in the short term it worked well for me.