Posted by H. Arya on November 20, 1998 at 21:19:36:
I recently borrow 50% of my 401K account.
I,m planing to invest in real estate,
purchasing income producing properties.
If after few years , be able to gain 50%-to 100%
of my original investment , I should say ,
i did a great job. still I be able to reinvest
the 50% of my income from income properties
back to 401k account, while still have
enough income to continue in real estate
investing. The key point is ,we must use
the 401k money very wisely and invest on
real etate properties with montly cash fllow.
Posted by Ann (HI) on November 19, 1998 at 12:10:11:
Can anyone tell me if it is possible to borrow against a 401K plan in order to purchase a home? How do you go about it? Is it anything like a self-directed IRA?
Re: Loan from 401K for home - Posted by Hugh Bromma
Posted by Hugh Bromma on November 20, 1998 at 20:11:38:
As administrators of self directed 401(k) plans for many years, we have found that Borrowing from your plan, if permitted can be advantageous if the rate your employer permits you to you pay back to yourself is more than your average market return. Your employer will have a loan policy which spells this out (or should have). Depending on the loan policy, you may statutorily borrow up to 50% of your contributory balance, and if your employer permits up to 50% of your other vested balances in the 401(k) and profit sharing balances with a maximum of $50,000. As you know from other postits, your employer may permit you to continue to make payments on a loan to you from your plan after you leave. Again consult the employer’s loan manual for your plan. Then pencil out the numbers. Remember that you are paying yourself back, and under the right condiditond this may be good, but it may also be bad based on ROI. Good luck. Call me at 800 392 9653 if you need help interpreting your company plan and loan policy for the plan.
Borrowing from your 401(k) Plan depends on your company’s plan document and what the document allows. Many 401(k) Plans do allow you to borrow from your plan. You should consult with your human resources department to get the specifics.
However, it does not always make financial sense to borrow from your 401(k) Plan. When you borrow from your 401(k) Plan you only pay your self back at the rate of around 6-8% per year (typically) and the market will usually yield a better return over the long haul - so you would be hurting the growth in your retirement savings.
In addition, if you should leave the company unexpectedly, the loan would usually have to be repaid immediately or will be considered a taxable distribution from your 401(k) Plan for the year in which you left the company. This is a dangerous tax trap that many people are not aware of.
My 401K plan was with Fidelity and allowed loans for up to 50% of vested capital. Payment periods were up to five years (your choice) unless the loan was for the purchase of your primary residence, and then it was up to 15 years. The payment, including interest, was taken directly from your paycheck.
When I left my job (trying to forget that word), Fidelity gave me a coupon book. As long as I continue to make the scheduled payments, nothing happens. If I do not make the payments (I don’t know how far behind they let you get), the loan balance remaining becomes earned income in that year and a 10% penalty is assessed.
There is a lot of sentiment against drawing from your 401K. I think most of it is just sediment. “Put your money in the bank and keep it there.” ideology.
First, remember that the interest you pay goes into your own account.
Second, sure, you’re losing the opportunity to make a larger gain in the market, but what if the market goes down? That’s all just a big crap shoot anyway. Wait two years and see how sure you are that it will continue to go up. And are you going to pick the investment that makes money or loses?
Third, your home is probably the safest of your investments. It WILL appreciate over time. It gives you stability against inflation.
Finally, for many people it’s the only readily available pot of money.
Re: Borrowing from 401(k) Pla - Posted by Doris - va.
Posted by Doris - va. on November 20, 1998 at 11:54:20:
Dear John - I think you had better think again
before taking a loan against your 401k. I am
not an expert by any means but I have done
more homework than you evidently. A properly
invested 401k is not a crap shoot and will in
most cases out perform the market. Remember -
this is for the long term and if you do the
numbers - the $ amounts are astronomical for
retirement purposes. Sure - you can borrow
and for emergencys or short term needs, you
can do it but you will be messing up the best
thing you have by interferring with the
potential earnings of the money so if you can
avoid it you will be glad you did later on.
I fully agree with the post from Wm. L. Exeter
on this subject. The biggest mistake I read
was to compare a 401k with sticking your money
in a bank account (savings acct). This is
like comparing a rowboat with a battleship.
Most old rowboats develop leaks and if you
factor in inflation - you will see the leak in
the savings account - a money leak. Please
John -do a little reading on mutual funds and
investments in general and you will come to
appreciate your 401k a little more. Of course
there are additional investments that are also
winners - like the deals we are trying to
learn about on this great site. Hope you have
success in this area also. Good luck. Doris
Re: Borrowing from 401(k) Pla - Posted by John Katitus
Posted by John Katitus on November 20, 1998 at 20:25:51:
I appreciate your comments and concern for my welfare.
IF your 401K money is invested completely in the stock market, in almost anything other than preferred stocks, you chance losing money. The amount of money you are apt to lose and the speed at which you might lose it are related to the risk you accept when you choose your investment. It also works the other way - the higher the risk the higher the potential gain.
The market has gone nuts the last few years. Almost everybody involved with it has made money. It makes it easy to illustrate long-term profits, just by selecting a period including the last few years. It’s just as easy to find periods that you would have lost money. But that’s the past. It has no direct influence on the future.
The market is a gamble. I have personally lost money in the stock market (maybe why I care so much). The value and movement of a single stock’s price, up or down, is not absolutely linked to the perfomance of the company. It is only directly related to whether other stock market investors are buying or selling that stock.
Read all the investment literature, and guess which way a given stock will go the next day. Or guess what number will come up and then roll the dice. I’ll stick with real estate.
Re: Borrowing from 401(k) Pla - Posted by Doris - VA
Posted by Doris - VA on November 20, 1998 at 20:36:07:
Hi John - Thanks for the reply. I can see
where you are coming from and we definitely
agree on our current goals. Real estate!! I
wish I had gone in this direction years ago. I have recently attended a couple seminars and have read and reread several books. Then I discovered this great site and learn more every day. Maybe I can post a success story soon. Doris.