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Typically it’s a bad idea. But if you absolutely need to do that, do it. You will pay the loan back likely over 5 years at the stipulated interest rate in your plan document (typically prime + 1%). The downside is opportunity cost of pulling money out of the funds your $ is in
DHG1 is right. Literally pulled the trigger on a 401k loan yesterday for a primary residence, term is 6-30 years (I get to pick). For non-primary residence the max term is 5 years (this is for EU with Fidelity).
20 years ago I took an in service withdrawal from my 401k plan to put towards our down payment on our home and never regretted doing so. We are living in our dream home and over those 20 years I’ve more than quadrupled my account balance
You can withdraw up to 10k from your 401k for your first home purchase without incurring the 10% early withdrawal penalty
At PwC you can take a loan out. You repay the loan with after tax dollars plus interest to yourself. No tax consequences unless you leave PwC prior to repayment.
I did it when the stock market was doing well and housing costs were pretty low. I ended up selling the house a few years later when the housing market was doing really well. I had enough to pay off the loan and enough for my next downpayment. It worked well for me, but I would not buy a house in the current market.
Thank you everyone for all the thoughtful responses!
Don’t do it unless your credit score is so bad that you cannot get a mortgage
OP, I just literally filed the documents to do this a few minutes ago and wanted to share my thought process. I only took 10,000 but I primarily took it because I prefer to invest in real estate v equities and bonds. I have an investment property with a partner, and will be turning my current primary into a rental after buying a new primary (down payment possible in part with funds from the 401k loan). I only invest in 401k to max out my match each year and this gave me an opportunity to pull some of those funds out. I’ll still get the 3.25% return on interest I pay myself on those payments and the appreciation (hopefully) from my new purchase. Have made about $20k/year in appreciation on both current properties which is essentially a 100% annual return on one (5% down primary residence) and 50% on the other (20% down investment property). Current primary should cash flow about $500/mo once rented and we’ll be selling investment property in next 60 days. 401k funds seem to be put to much better use - in my specific case - in real estate v the market (unless market goes to 50,000 points...).
Also, the 3.25% interest is still better return than bonds - so if you think of it that way you’re just reallocating your investments... Do check and see if repayment is required in full when you leave your firm or if you can continue regular payments (I can continue regular payments).
I’m not sure I’d go that route in this market
Know that if you take a loan out of your 401k and then leave your job, and the plan, that amount will be considered a taxable distribution.
If you don’t repay on departure and the plan doesn’t allow continuing payments and you roll over the 401k/close it.
Just make sure when they take the 401K money out that they take the taxes out or you will get a large bill during tax time. They didn’t withhold taxes on us and it was a nice surprise the next April.
Loans aren’t taxable events
I did this 4 years ago when we bought our home. It’s basically a loan to yourself and yes it will affect you generating more income in your 401k but honestly I’m pretty young so I have plenty of time rebuild wealth. Loan was for 5 years and I’ve since left the job with where my plan was. I easily set up automatic loan payments to be drafted out of my bank account each month so I wouldn’t get hit with the early withdrawal penalty. It’s better to build equity in a house versus giving it to someone in rent is my thought.
Also might add I was thinking of paying off the loan this year but with the pandemic going on I’m saving any extra funds to be thrown to my student loan and would rather be more liquid now during this time.
It depends on your situation. I had over $250,000k in equity in my current house with a loan with less than 7 years remaining. I did not want to refi or take out a second mortgage on the house but saw a piece of land I wanted for a retirement home. It was a great price but more than I wanted to take out of my cash reserves. By taking out a 401k loan I was able to put enough down to cover a big chunk of the land costs and had enough “equity” to get a construction loan. I was paying interest to myself and it doesn’t show up on your credit report as debt.
I did it for a modest home because I couldn't stand renting for another three years while saving up the down payment I needed.
In general, it is better not to borrow against your retirement, and pay a down payment out of your cash savings, but it's not going to ruin you financially.
Currently the market is still REALLY low, so you'd be losing out on some of the growth over the next 3-5 years if you take out a loan now.
Speaking as one who qualifies as an "elder" in this profession, I'd suggest you proceed very cautiously here. I see postings from people who've had it work out well; those for whom it didn't work out well may not still be around to post here. If you do it, I wouldn't take out more than $20k-$25k, especially if your balance is less than $100k. Needing a 401(k) loan to buy a house could be a sign that you cannot yet afford a house, or that you are considering more house than you can afford. My first residence was a dump, but it fit my budget and I still did more than fine when it came time to sell it and move to a nicer place. Just food for thought.