401k question

LennyOnPs3 · #1 (**permalink**) 03-31-2008, 11:18 PM

is it a bad idea to take out money from you 401k to put as a downpayment on a house/condo? i have about $7k that i can use towards a house (if it came down to buying) probably not thinking of buying a house for AT LEAST another year or 2 but just curious to hear some thoughts on this.

how does borrowing from your 401k work?

sweeps · #2 (**permalink**) 04-01-2008, 04:05 AM

It's a bad idea to take money out of your 401k for anything except your retirement. Sure, there are extreme circumstances where it may be necessary, but it's generally considered a last resort.

If you withdraw from your 401k, you will pay taxes and a 10% penalty on the amount you withdraw. Ouch.
If you borrow from your 401k, you will have to pay that amount plus interest back to the account. True, you are paying yourself interest, but you're paying with after-tax money. Also if you leave your company, you will likely have to pay back the entire loan immediately.

And keep in mind whether you withdraw or borrow from your 401k, that money is no longer growing for you. You're missing out on valuable tax-deferred growth.

LennyOnPs3 · #3 (**permalink**) 04-01-2008, 05:26 PM

thanks for that info i had been under the impression that when you borrow for your 1st home or something like that they dont penalize you or anything like that.

disneysteve · #4 (**permalink**) 04-01-2008, 06:20 PM

They don't penalize you for borrowing, but as sweeps said, it is still a really bad idea.

Retirement accounts are for retirement. Period. Unless you have some major financial catastrophe, your 401k, 403b, Roth/IRA should be considered off limits. Buying a house is not a catastrophe.

jIM_Ohio · #5 (**permalink**) 04-02-2008, 11:00 AM

If you withdraw the money, one point I would make is to pay it back in shortest timeframe allowed.

I have had 401k loans before- and after seeing one loan draw out for 7 years (I borrowed around 7k for first house and paid back $50/month), I realized with my next loan to pay it back sooner (borrowed 20k+ and paid it back in 13 months).

Hypersion · #6 (**permalink**) 04-02-2008, 09:58 PM

Run the numbers

What's the interset rate on the mortage?

What's your expecte rate of return on your 401K?

What interest rate does your 401K charge?

In general unless you have bad credit it usually a better idea to keep the money in your 401K.