STYLETHREAD -- LET'S TALK SHOP!

Andrea Julia · Coach

Borrowing from a 401K

atlgirl · Gucci

I wouldn't recommend it. You pay the interest and the penalty - 20% back to the gov't next year on your taxes, and trust me, it's costly. Long story short - hubby and I were *both* out of work for an extended period several years ago and had to take some $$ out of ours - once one year, and once the next. It killed us both times the next year on our taxes. Plus you can't really get that money "back", so to speak, later on. It's best (IMO) to leave the 401 (k) money alone if at all possible.

HeatherLynn · Gucci

Please dont do it!!!! It is much better to get a loan or a credit card!!! There are so many draw backs to taking money out of your 401k!!!

cc · Marc Jacobs

I know 401ks are stricter but the savings/retirement fund program that we have at my company allows you to do something called a "hardship withdrawal" under certain circumstances, one of which is buying a home. The reason you are withdrawing has to be approved but if it is I don't think there is any penalty (other than possibly not having the company make its contribution for 6 months). And you withdraw the money, not borrow it so you don't have to repay anything.

So you might want to look through whatever information you have on your account or talk to someone in your benefits department to see if you can withdraw for this particular purpose without penalty.

-- Edited by cc at 12:52, 2005-07-09

honey · Gucci

i agree with cc. talk to your benefits advisor. i know a lot of companies have clauses that allow you to borrow specifically for the purpose of buying a home. i believe that when you borrow money, you pay it back with after tax dollars (which makes a difference) and you don't earn any additional interest until after you pay back the loan (but i'm not sure about that). a key thing to consider is your company's matching and vesting policies. if you have a really good match policy (i.e. one where it's dollar for dollar) then it's probably not the best idea, but it also depends on how vested you are. for example if you're 100% vested, then all that money is yours, if you're not then you should also consider how much of the money is actually yours b/f you borrow.

also you should know that if you leave your job you have to pay all the money back or face tax penalties (atlgirl mentioned this). this is also something to consider. it's not really the best idea, but it's not the worst idea. i closed out a 401k plan when i left my job 2 years ago. it wasn't that "bad." and even after all the penalties, i didn't end up owing the gov. money. while i wouldn't do it again, it's important to weigh all the factors. additionally lots of places offer programs to help first time home buyer programs where you pay very little down. i would look into those options first b/f going to the 401k.

-- Edited by honey at 13:27, 2005-07-09

NCshopper · Hermes

I would highly recommend NOT taking the money out of your 401K. The money that you will make in interest alone over the next few decades by just leaving your money in the 401k will most likely FAR exceed what you will make on the house. But, it depends on where you're planning on buying, how long you'll be staying in the house, etc. If you do take money out of your 401k, you will probably face some sort of tax penalty for doing so. Talk to your benefits person at work, your financial advisor, your parents, basically any "adult" and any resource to get some ideas. Also do some research online and check out Suze Orman's books--she's been a great resource for me.

Good luck!

JoceyBaby23 · Gucci

Most plans will allow you to withdraw from your 401K IF and ONLY IF you are buying a home. There is NO penalty for this, in my plan anyway. My husband and I may pull some out when we move in the Fall. If you want to withdraw and use it for something else, that is when you will pay the high penalty fees.

Farrah · Marc Jacobs

AJ - no, no, no, no, no. Borrowing from you 401K is never a good idea for ANY reason. I suggest picking up Suze Orman's The Money Book for the Young, Fabulous and Broke for a professional's advice and insight on why this is not a good idea at all. HTH!!

Andrea Julia · Coach

My 401K plan charges interest on the loan. If I remember correctly, it is 1% above prime. I don't know who gets the interest though: me or the bank. I'm guessing the bank. I never thought about the tax penalties, but now that I think of it, when a trust fund I had was released, I was taxed like crazy. I could see it being the same thing, which is bad because part of the way I planned to pay back the loan is with my tax return. You guys have all convinced me that this is a bad idea. I was willing to lose the interest between the time I took out the loan to the time I paid it back, but I'm not willing to pay double taxes or anything.

The reason I was considering this is that I am filling out the Affordable Housing forms and I won't actually have enough of a down payment until March when I get my tax return and bonus. I want to send in the form now because average wait is one month to a year and a half. Also, when I get my next raise in March, it may put me over the maximum amount you can make and still qualify for Affordable Housing so I want to get my app in while I still make a small enough income. Otherwise, all condos in my area are at least $200,000. I guess I will just apply now and hope that it takes until February or March for something to become available for me.