Is taking a loan from my 401k for downpayment towards a house - a good or a bad idea? No problem in paying back that loan, just need that lump sum capital for now. Reading many different things online. Would like to hear from someone who has done it?
Works fine. If you leave your employment before the loan is repaid, remaining amount is due in 30 days. Otherwise it becomes a taxable distribution which has a 10% early withdrawal penalty and is taxed as income.
This is not true. I have done it last year, left the company 2 months later.. I just have a monthly payment scheduled. Custodian is Fidelity
The main pitfall is that if you ever got laid off you need to find a new source of financing because it’s due on the spot. As long as you have a recovery strategy, paying the interest to yourself is a nice way to go. If your company offers matching, you may lose that so work that into your calculation.
Actually, some companies’ plans, if you leave or get laid off, will let you continue making the payment on your loan - and it will not come due right away. This is exactly what I did; took a loan against my 401K for down payment and when I left, continued making the payments. My former company used Fidelity as its retirement planner. Call and ask your plan provider.
Pretty sure the max is $50k, so factor that in as well. Also I believe it doesn't affect your credit since the money is technically yours already which is nice when trying to finance the rest.
Where can I check this?
It’s probably in your plan description summary. I think $50k or half your 401(k) balance, whichever is less, is typical as a max loan.
I did. It’s a great move if you’re early in career.
Don't forget that the funds you loan are double taxed... The money you pay back is taxed and the same amount will be taxed again when you withdraw.
The *interest* portion of the repayment is new after-tax dollars being contributed that will get taxed again at withdrawal. The *principal* portion of the repayment is just returning what had already been contributed pre-tax, and is taxed only once when eventually withdrawn. Opportunity cost is real... You have got to be at peace with the knowledge that the money would probably grow faster in the market than it will in the house.
If you are far far away from retirement then it is a good idea because you pay the interest on loan to yourself. And in the long term the returns you would lose for the period when you pulled out the money would not really matter.