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401k loans
Old 08-29-2015, 07:21 AM   #1
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401k loans

Most pundits say to never borrow from your 401k. However I am considering it, and here's the circumstances.

I am just shy of 59 YOA, plan to ER at 60. 340K in 401k, also will have a nice pension (or lump sum, but that's a different thread). The housing market in my primary home area finally got hot. I will be prepping it for sale early next year. Meanwhile up north where my retirement home is, the market is still soft. I am seriously considering buying a chunk of land for recreational purposes before prices there start back upward (one of the last things on my aquire before retire list).

I am thinking of borrowing 50k from my 401k for no longer than 9 months. My thinking is this. Market is a bit volitile, I think the correction could mean I'd be paying myself back at a better rate than I'll be making. I hear those that would say I'd be better off investing those payments , but I'm suggesting that land price increases next year could offset any gains in those 9 months. I would pay off the 401k loan with some of the proceeds with the primary house sale early to mid next year.

At the moment this is just rolling around in my head, I haven't gotten the calculator out yet. I'm curious what others think - is there a scenario where a short term loan from a 401k makes sense?
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Old 08-29-2015, 07:25 AM   #2
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It sounds like your are trying to talk yourself into buying the land with a market timing rationalization.

Why not just buy the land and finance it with a conventional mortgage on the property or a cash-out refi or HELOC on your retirement home? Wouldn't that be easier?
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Old 08-29-2015, 08:06 AM   #3
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Many years ago, we used my 401K for a bridge loan in a real estate transaction to fund the 20% down payment. We bought our dream house, which needed several months work before we could move in. It then took several more months to sell the old place. About 7-8 months total before we repaid the loan. It was SO much simpler than an actual bridge loan... no qualification delays, no credit score implications, no "real" interest cost, no discernible impact on growth. Yes, conventional wisdom says 401K loans are a bad idea. But in our situation, it worked out very well. So yes, I think there are scenarios that make sense for a 401K loan.
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Old 08-29-2015, 10:00 AM   #4
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You do have to pay back the loan before you leave your employer, which could mean working for awhile longer if your primary house doesn't move quickly.
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Old 08-29-2015, 11:13 AM   #5
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You do have to pay back the loan before you leave your employer, which could mean working for awhile longer if your primary house doesn't move quickly.
This may be your greatest risk factor. Most times when you leave employment, the 401k loan is now a permanent withdrawal and taxable, possibly with penalties if an early withdrawal.
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Old 08-29-2015, 11:13 AM   #6
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You do have to pay back the loan before you leave your employer, which could mean working for awhile longer if your primary house doesn't move quickly.
Depends on the plan. Some allow you to continue repaying the loan after separation from service. Also, if you leave the employer at age 55 or older, the remaining balance on the loan could be considered a qualified distribution if you don't want to pay it back.
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Old 08-29-2015, 04:30 PM   #7
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You do have to pay back the loan before you leave your employer, which could mean working for awhile longer if your primary house doesn't move quickly.
This depends on your employer plan. We actually did take a 401k loan before DH retired. This was for a specific purpose where we didn't want to withdraw money from any other account. We wanted to take it as a loan and defer making it a withdrawal to another tax year. Anyway, DH was able to continue with the loan after retirement as his plan allowed that. In reality as soon as the new year turned over, he converted the loan to a distribution but he could have kept the loan for the full 5 years. (Note that he was over 59 1/2 so there was no penalty due, just the taxes).
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Old 08-29-2015, 05:32 PM   #8
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Depends on the plan. Some allow you to continue repaying the loan after separation from service. Also, if you leave the employer at age 55 or older, the remaining balance on the loan could be considered a qualified distribution if you don't want to pay it back.
I wasn't aware that you could claim it as a qualified distribution but that makes sense if you are either over 59.5 or are leaving after 55 from a plan that allows penalty free if retiring after age 55or older.
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Old 08-29-2015, 06:37 PM   #9
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I wasn't aware that you could claim it as a qualified distribution but that makes sense if you are either over 59.5 or are leaving after 55 from a plan that allows penalty free if retiring after age 55or older.
Note that in any case he has about 1/2 year till he can withdraw from the 401k at 59.5 with no penalty anyway (he said he was about 59) So the age 55 rule is not really needed here.
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Old 08-30-2015, 06:42 AM   #10
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It sounds like your are trying to talk yourself into buying the land with a market timing rationalization.

Why not just buy the land and finance it with a conventional mortgage on the property or a cash-out refi or HELOC on your retirement home? Wouldn't that be easier?
More like trying to use timing as an excuse to do a 401k loan instead of the other options you mention. Last few times through the refi-equity draw method were slow and a lot of grimble. Even when I bought the retirement house I mortgaged that and the paper grind was incredible. For a 6-9 month swing I figured it would be painless, but I get your point, and like many others here I tend to not be a market timing kind of guy.
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Old 08-30-2015, 06:46 AM   #11
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You do have to pay back the loan before you leave your employer, which could mean working for awhile longer if your primary house doesn't move quickly.
I'll have to sell the house before I retire anyways. Plan is to LBYM at enough below today's income that the house has to go!
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Old 08-30-2015, 04:25 PM   #12
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I did a 401k loan to replace a stolen truck....talked myself into it as a 'good deal'.


Don't do it. It hurts in the long run.
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Old 08-30-2015, 08:14 PM   #13
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I see no issue given the short-term nature and your intent to use money at 59 1/2 anyway, it's your money and your decision with thought. The others who are giving why general loans against a 401k are bad are correct, they generally are not in the best interest of savers building their nest egg. I view yours more as a alternate withdraw strategy.


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Old 08-30-2015, 10:26 PM   #14
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I pulled a 50k loan against my 401k on the 10th of June. I did this for several reasons:

1. We closed on a house and did not wish to pull additional money from our investments (tax consequences) and did not wish to increase the amount we had financed. The 401k loan is basically ready cash, no paperwork, no tax consequences.

2. I knew I would have income shortly from the sale of some crops. Thus, the 401K loan would be repaid within 6 or 7 months. This allows me to flex the sale of crops into this year or next year, again to deal with tax consequences.

3. Of course, I knew the market was going to drop, and this was simply a market timing event. Just kidding, for all those folks with no sense of detecting humor! But seriously, similar to the OP, this was using the 401k loan as a piggy bank for a short term loan. If the market had taken a big run up, these funds would not have appreciated. If the drop in the market holds until after the loan is repaid, then it was some pretty cheap cash.
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