401(k) Situation

[Danny S.]

Good Morning BP!

So I have about $19k stuck in a 401(k) account with a former employer. I'm fairly young, 30, so my investment allocation was 85/15 stocks to bonds. Since its inception over 5 years ago, my overall rate of return has been 5%.... not that stellar. I've been pondering on withdrawing the money and using the funds towards updating my personal residence in preparation for renting it out. I understand the tax implications if I do go forward with this but wanted to ask the BP community before doing so.

Thanks in advance for any advice/support!

[Link McGinnis]

Congratulations on planning!

I would consider BORROWING the money from your 401(k) IF the amount you could borrow would be enough for the renovations you have planned.  Most plans allow you to take a maximum of 50% of the value at the time of the loan request.  So, you will only get to borrow and use about $9,000 from your account. 

Plans vary so check with your administrator on your plan's rules, but common rules are that you pay the loan back over 5 years with interest.  The interest may be 1-2% above prime, for example.  The bad news is that you have to pay it back and you will pay interest.  Monthly cash flow could be a problem. The good news is that you are paying the interest into your OWN account.  That's a win for your retirement account.  

Talk to a tax adviser about moving that money from your old company's 401(k) to a rollover IRA or other retirement account before you make this move.

If you have equity in your home, you may want to consider getting a HELOC from a local bank/credit union. You may only have to pay interest for the money you take out of the account and you can take it out gradually as you do the work.

Good luck - I'm going to follow this post to see what you decide to do.