Borrow Against 401k

Frequently Asked Questions

1. QUESTION:
   Why is it bad to borrow against 401k?
   Everything i read says it is bad to borrow against 401k. One of the reasons i see is that the money you are paying back into it would be taxed. If you were to take out a loan for the purchase, the money you would be paying that back with would also be after taxes. So wouldn’t it be better to be paying yourself that interest? So my question is what am i missing, i am sure there is something as everyone says to not do it.

   • ANSWER:
     Think of it as giving yourself a loan. If you were to borrow from a bank you would be paying them with money that has been taxed. Remember, it is a loan payment, not a contribution to the 401(k).

     You are paying yourself the interest, however you are losing the interest the money would earn (tax free until you withdraw, preferably when you retire) if you left the money in the retirement account.

     In addition you would have to repay the entire amount all at once if you were to terminate your employment or be taxed and penalized for make a early withdrawal.

2. QUESTION:
   is it cheaper to sell stocks or borrow against 401k to pay bills?
   Close to paying off bills. Can sell stocks or borrow from 401K to pay off bills. Which is better to do?

   • ANSWER:
     Borrowing from the 401K…

     If you sell stock, and you happened to have made money from it… you are on the hook for Capital Gains taxes… If you lost money on the stock, you can write 00 off your Federal taxes each year until the loss is consumed, or you have capital gains down the road. Then you can write off the loss penny for penny with the gain…

3. QUESTION:
   Can I borrow against my 401k for a first home downpayment?
   I am having trouble saving for a downpayment, especially this time of the year. I hate to wait to save just enough for a downpayment. I’ve been told that I may be able to borrow against my 401k and pay interests to myself.

   • ANSWER:
     You can take a loan against your 401(k) for any purpose. Generally, you are allowed to choose the repayment period, up to 5 years. However, if the loan is used to fund the purchase of a first home, you can elect to repay the loan back over 30 years. The interest charged on the loan is essentially paid to yourself.

4. QUESTION:
   Is it OK to borrow against your company 401k?
   I want to know if it’s ok to borrow against your 401k. I invest at 3% and my company matches me dollar for dollar. I want to use it for Christmas on my children. I don’t really know the rates and little naive. So can anyone help out. Thank you.

   • ANSWER:
     The most important gift you can give your children is to instill the need to live within your means, save for the future and that happiness isn’t some junk bought from the store that is quickly forgotten.

     This is not a we won’t have Christmas this year, but have it on a very strict budget. If there is just no money between now and Christmas to be had, you can’t afford to pay back what you borrow either.

     Then for next year, you start the family on a Christmas savings plan. Have everyone make contributions, things like pocket change, and so on. Keep track of accounts and such. Then next year you give each child everything they’ve saved plus a portion of what the family has saved (that would mean the parents) with one thing. Not over half the total can come in the last three months of the year.

     Many if not most people go through life moving and reacting only to the closest crises, never getting ahead, never ready for even the predictable things. If you use this event to teach your children how to get off the crises treadmill, plan for their future and live within their means, you will materially improve their lives and satisfaction with life. What a wonderful gift.

     Marv

5. QUESTION:
   While never prudent to borrow against your 401k – did I get lucky with an exception?
   I dont need a lecture on the why you never borrow from your 401k, but I had to, and I did so right before my portfilio took a 15% hit (and climbing) My thinking is I sold HIGH and now I am buying them back slowly at a lower price – besides getting lucky on my timing – if there is such a thing as a good time to borrow from 401k, was this it?

   • ANSWER:
     If you can buy back at a lower prices, pay off the loan for the full benefit of “selling short.” ! assume you are in it for the long term. Opportunities like you are getting will help cover your losses on the rest of the portfolio and when the market comes back, and it will, you will have made real money. Don’t listen to the common line put out by your 401k administrator and your company. They love the sheep who think you only make money buying in the hope of increases in prices.

     Good luck

6. QUESTION:
   Is it good to borrow against my 401K to pay off high interest credit cards?
   I have some high interest credit that we can never seem to pay down. We have not added to the balance in over a year though and I am more than willing to cut them up. Should I borrow from my 401K and pay myself back at 8% interest to pay off the cards?

   • ANSWER:
     Absolutely Not, unless you are in trouble financially

7. QUESTION:
   is it smart to borrow against your 401k to pay off credit card debt?
   I have 8,500 in credit card debt and about 15,000 or more in my 401k. I’d like to know if it would be a smart idea to take a loan against my 401k to pay off my credit card debt, that way there would only be one payment and it would be much lower. I’d also like to mention that i’m only 24 and won’t be retiring any time soon.

   • ANSWER:
     If your job is secure, and your credit card interest rates are higher than your average 401(k) earnings, this probably is a smart move. Interest on 401(k) loans usually is lower than most credit card interest.

     Also, the interest you pay on a loan against your 401(k) goes back into the 401(k), so you’re actually paying yourself while consolidating your credit card debt. And paying your cards off may even increase your credit score a bit.

     Be careful, though, not to fall into the trap of running up major new balances on those cards you’ve just paid off. Then you’d be in worse shape than you were before you took out the loan on your 401(k).

     Good luck!!

8. QUESTION:
   Most financial planners tell you NOT to borrow against your 401k plan. Why?
   I would think that if one were to need to borrow money, a loan against a 401k would be the best bet–what loan provides a better option than paying back principal and interest to one’s self?

   • ANSWER:
     When you put your money into the 401(k), you are doing it with pre-tax dollars.

     When you pay-back the loan, you are doing it with after tax dollars.

     So, you lose the tax benefit of the 401(k) associated with loan amount.

     Furthermore, when that money is loaned, it reduces your 401(k) balance by the loan amount, so the money is not available to grow (and compound) like it otherwise would.

     On top of that there is usually some fee that is paid to the loan administrator for servicing the loan. It is not usually a large fee, but it is still a consideration.

     Because a 401(k) plan is intended to grow for some future retirement income, ideally it would not be used as a source of current income.

9. QUESTION:
   Im looking at returning to school to earn a Masters degree. Can I cash out or borrow against my 401K ?
   I have been told if I leave my current employer I may be able to cash out or borrow against my 401K as a way of helping me finance my pursuit of getting a Masters degree.

   • ANSWER:
     You can always cash out a 401k, but you will have to pay the deferred taxes. Because it is for higher education, you do not have to pay the 10% penalty.

     A loan against your 401k is an option, but during the time you are repaying the principal, the money borrowed does not grow from the investments in the account, only from the interest your are paying yourself back.

     Generally, I would recommend just getting a government backed school loan if possible and leaving your 401k alone. The repayment period for school loans can be put off until after you graduate and usually will have a much longer repayment period, which means the minimum payments will be lower. Another benefit is that the interest for the student loan is tax deductible, if you are under the income restrictions. http://www.irs.gov/publications/p970/ch04.html explains the details, but basically if your single income is under k or joint is under 5k, you can take the full deduction.

10. QUESTION:
    Does it make sense to borrow against my 401K to pay off a debt?
    I was told that it is possible to borrow money from my pension plan to pay off debt. I was under the assumption that you could use 10K for a first time homebuyer and not be taxed or pay out penaties. Does anyone know about this sort of thing. I am also not sure if it is a 401K but it is a pension plan. Does it depend on my company?

    • ANSWER:
      Depends upon the type of 401K and how it is structured. Check with the administrator of whatever company holds the 401K for you and have them explain whether or not you can do that. There are restrictions for use of money withdrawn from a 401K (usually to buy a home) and there are penalties, too. In the long run it might cost you much more than the original amount of the debt.

11. QUESTION:
    Should I borrow against my 401k to pay off my credit card debt?
    if I can only pay the minimum each month, would it be wise if i just took out from my 401k and paid it all off to save more?

    • ANSWER:

12. QUESTION:
    Would it be a good idea to borrow against my 401K to pay off credit card debt?
    If I decide to do this would it help raise my credit rating? Also what is the best way to get your credit score to go up?
    There are no penalities to take a general purpose loan against my plan. It seems to me that it would be better to pay myself back the interest (8%) than pay the credit card companies.

    • ANSWER:
      You are correct, there are no penalties involved in borrowing from your 401k. But there are disadvantages.

      If your 401k is doing well, you lose that interest. For example, if it’s making 10% a year, you are actually paying 18% interest to borrow it.

      This is really nothing but a consolidation loan, so I’ll just give you some advice. If you do this, you must STOP using your credit cards until the loan is paid. I’ve seen too many people take out consolidation loans to pay off credit card debt, then turn around and run up those now-empty cards all over again. Now they are twice the amount in debt and can’t get out of the hole they’ve dug. The end up filing for bankruptcy.

      So if you go this route, take my advice and put your cards away. Budget yourself.

13. QUESTION:
    How can I buy my first home if I don’t have much saved for down payment? Can I borrow against my 401K?
    I’m frugal, my credit is good and I currently earn K/year. I contribute the max. allowed to my 401K. I also have a small amount of my car loan remaining and student loans of about K remaining.

    • ANSWER:
      There are several loan options available to someone with your credentials, even without a down payment. There are FHA loans and almost any mortgage company will have a program that allows you to get a mortgage with little or even no down payment.

      And regarding your 401K, I would not recommend touching that money unless you have no other options and you’ve talked to a tax professional about any penalties you may face by borrowing from it.

      I recommend you continue saving as much as you can for your down payment on your house.

      Twenty percent of the cost of the home is the typical recommended down payment, but there are numerous loans that let you put down less. It’s usually better to put as much down as possible, but it’s nothing to worry about.

      This is a buyers market in most parts of the country and will probably be this way for a while, so there really is no need to rush. Take your time and find a good deal on a home and work with a trusted mortgage professional to find the best rate and payment available to you. You’re in a really good place right now with good credit and you shouldn’t have any trouble getting a good mortgage.

      I hope this answers your question.

      I have added a link below with more information about down payments. Good luck with your home search!

14. QUESTION:
    Is it pretty smart idea to borrow against my 401K to purchase a new vehicle?

    • ANSWER:

15. QUESTION:
    How much can a person borrow against their 401K at work.?

    • ANSWER:
      That depends on the specific 401(k) plan. Some employers’ plans do not provide for loans at all. The laws governing 401(k) plans allow employers to incorporate restricted loan provisions into their plans; however, they are not REQUIRED to do so.

16. QUESTION:
    Will I be able to borrow against my 401k to buy a new car with no penalties? How does repaying the loan work?

    • ANSWER:
      Yes you can. You’ll need to go to personel. You can borrow up to 50% of what you have vested.
      Depending on the size of the loan, you can take up to 5 years to repay the loan. There will be a loan fee charged. Only your personel person can tell you what your 401K program charges. And the last I heard, you can have a maximum of 2 loans, with a minimum loan value of ,000.00.
      Hope you like your new car!!! I did this when I bought my 2003 Mustang, love my ride.
      And no penalties, it is a loan and not a withdrawal.

17. QUESTION:
    Can I borrow against my 401k to purchase a house in Canada?
    I am a Canadian Citizen. I have recently moved back to Canada after living in the USA for several years. I have money in 401k, but none in an RRSP. My question is….can I borrow against my 401k from the USA to purchase a primary house (my only house in either country) in Canada? I know I can borrow against 401k to buy a house in the USA, or borrow from an RRSP to purchase a house in Canada, but does it work the same from borrowing from 401k to purchase a house in Canada?

    • ANSWER:
      Have you checked the website of URT prolific regs from the IRS?

18. QUESTION:
    Can I borrow against my 401K to put money down on a house?
    Is this possible? Or advisable?

    • ANSWER:

19. QUESTION:
    Is a bad idea to borrow against your 401k to use as a down payment to purchase a home?

    • ANSWER:
      not really since u have to pay it back anyway. You are borrowing from yourself, and repaying yourself at a very low interest rate.IF u know u will be at the same job and keeping payments and savings to the 401 for the next 3-4 years, then go for it.

20. QUESTION:
    SHORT TERM BORROW AGAINST 401K TO HELP GET OUT OF A HOLE?
    Currently my boyfriend is laid off, I am working full time, but we are struggling a lot with a new baby and everything else. Since my car is only a 2 door, I have been driving my parents 2nd car because it is 4 doors. My parents said that if I could sell my car, I could drive theirs still for a while, with no car payment til we get things straightened out financially. However, I am going to get probably about 00 less than what I owe on the car. I have someone that offered to buy it, but I need to come up with the 00 to pay the difference. I know it is not the best thing, but if I borrowed against my 401k, paid that off, got rid of the car, and had the payments to my loan taken out of my paycheck directly I will not get hit with any tax penalties. I actually will probably pay it in full after the first of the year comes and I get my income tax return. So really I’d only be borrowing from my 401k for a few months. My boyfriend and I are arguing about whether this is a ridiculously stupid idea, or if it will help. (I think it will help, he thinks its stupid). ANY advice would be SO welcomed because I want to make a good decision and wasn’t quite sure where to turn. Thank you!

    • ANSWER:
      Borrowing from a 401K can be a the best option. I hate doing it. If you are laid off often the loan comes due 100%.

21. QUESTION:
    Is it possible to borrow against or cash out my 401k without my employer’s knowledge?
    My employer does not match the 401k at all, so everything in there I have contributed myself. Is this possible to do if I go straight to the financial company that handles the 401k?

    • ANSWER:
      You cannot “cash out” a 401K account while still employed at the same employer.

22. QUESTION:
    My employer does not allow borrowing against my 401k. Can I roll a some $ into another acct. for home repairs?
    I need to do some much needed exterior repairs to my home.
    I would like to borrow against my current 401k, but my employer does not allow this.
    Can I roll a portion into another type of investment acct. without any recourse and borrow against it and pay myself back?

    • ANSWER:
      No, while you’re employed the only distribution you can take against your 401(k) would be for a hardship, such as extreme medical expenses.

      You cannot do any kind of rollover from your 401(k) unless your employment is terminated. At that point, you can do a direct rollover to an IRA, but you cannot borrow against an IRA. Doing so is considered a prohibited transaction and it’s treated the same as a premature distribution – 10 percent tax penalty plus regular income tax on the total amount.

      The only way you could possibly accomplish what you want to do – and it would be a foolish choice – is to terminate employment, request a distribution from your 401(k), use the money for less than 60 days and eventually deposit the funds that were distributed to you into an IRA. The government gives you a 60-day window to accomplish a rollover, and you can have tax-free use of the money within that time frame. But, you have to waive withholding on the distribution and be careful to complete the rollover within the 60-day limit. I don’t recommend it.

      As jlf states, these types of accounts are intended for your retirement. If you want to make repairs to your house, start a separate savings account and set aside regular amounts each time you get paid. Eventually, you’ll have enough saved to do what you want.

23. QUESTION:
    Can you borrow against a 401k?
    Ok here is the situation. My sister-in-law wants to get a divorce but has no $$ to get out on her own. She wants to go to a bank and get a loan using her 401K (or whatever retirement account she has) as collateral. She has about 10k in the account. Is this possible? She does NOT want to withdraw from the account because I have told her that she will get hit with big fees and loose much $$ in the process. Ideas, comments, suggestions appreciated.
    Oh yea…one more thing. She does not work for the company any longer….

    • ANSWER:
      It depends on your 401K plan. Most plans allow for borrowing of up to 50% of the balance you have in the plan… You pay it back to your 401K with interest, but the interest is deposited to your account as well, since you are effectively borrowing from yourself.

24. QUESTION:
    as bad as things are now,should you ba able to borrow against your 401k tax free and penalty free?

    • ANSWER:
      No…though it would alleviate the pain right now it would just be shifting it to your old age where you are less able to take steps to offset it -like work 2 jobs. In addition, by taking money out you lose out on compounding benefit of your 401k thus making it even harder to recover.

25. QUESTION:
    I didnt borrow against my 401k in 2010 but I received a 1099 for my 401k 2010.. why?
    I took out a loan and did a withrawl in 2009 from my 401k. i just paid taxes on the withrawl part because i filed taxes wrong at the beginning of 2010. Now I’ve received a 1099 from my 401k for 2010.. but I didnt borrow against it. I did however change jobs in 2010 and i havent yet rolled over my 401k and my loan was not paid in full. What is the purpose of the 1099 for my 401k (2010)?

    • ANSWER:
      The unpaid balance on your 401(k) loan automatically became an early withdrawal once you terminated your employment without repaying it in full. It IS a 2010 withdrawal. Too late now.

      Look at Box 2a (taxable amount) and Box 7 (code showing withdrawal reason).

26. QUESTION:
    should a person borrow against his/her own 401k to pay off high interest rate credit cards?
    thank you all for your input. I have decided NOT to touch my 401k.

    • ANSWER:
      NO. . . . .

      The reason is simple, just as soon as you pay off your credit cards, most people will just run them up again. So then you have the 401K loan, and credit card debit.

27. QUESTION:
    Borrow against my 401k to buy house?
    I am 31 and moving from FL to SC. M job here did not match my 401k and I currently have about 2,000 in it. A friend of mine is a mortgage broker and he looked at my credit report and says that I would not have an issue qualifying for an FHA loan. The homes I am looking at are all around 90k. with 3% down I would need about 00 (plus I have 2500 saved) . I plan on asking the sellers to pay clocing costs and/or price reduction to help with anything that may come up during the home inspection. My question is, since the 401k amount is only 2k would it be a good idea to borrow against it to help me get into a home? My mortage would be less than what I would pay renting and I am SOOOO ready for something that is all mine.

    ***My next employer will be matching my contribution which I plan on increasing to 5%

    • ANSWER:
      Make sure that the loan officer isn’t getting you an FHA 2-1 buydown.

      Alot of loan officers are doing that with FHA loans and when people say that the “mortgage payment is less than the rent”…that is usually a dead giveaway for me….it’s usually about the same, but not significantly less.

      If you only have ,000, go ahead and cash the 401K out…the tax penalty will be very minimal on that amount of money and you won’t have to pay yourself back.

      You also need to find out how much you need to have in reserves…FHA usually requrest for at least two months of reserves to be in savings and/or checking.

28. QUESTION:
    Should I borrow against my 401k?
    I have the opportunity to accept a job as a recruiter, but I would have to move. I am upside down 40k on my house and would have to short sell. The job I would be taking, I would be making 30-40k less 1st year, but would most likely make 200k inside of 3 years whish is double my salary now.

    My question to you all…It is in a place we want to live in and a job we want. We have a child on the way. We have no credit card debt and 75k in my 401k. Should we possibly borrow against it and move to the place we want to live for a career that has more long term potential with an immediate loss of income and possibly use my 401k? Would any of you do this? (keep in mind we do not like where we live and I hate my job)

    • ANSWER:

29. QUESTION:
    Can I borrow against my 401K for a down payment on an FHA Loan?

    • ANSWER:
      That would be a very bad idea. Your 401K share price have probably never been lower. When you take a 401K loan, they cash out a portion of your shares, and then you pay back into your 401K at a set schedule plus interest normally over a period of 5 years. In the next 5 years, your share prices are in all likely hood going to rise. So in essence you would be selling low, and buying high. (not the smartest thing to do)

      As described above is actually the best case scenario. If you leave your job for any reason, you have to pay the 401K loan back in one lump sum payment, otherwise it becomes a non-qualified withdraw that you have to pay penalty on plus income tax.

30. QUESTION:
    How many times can you borrow on your 401k?
    My husband and I borrowed against his 401k twice in the past 10 years. Is there a limit to how many times you can borrow on your 401K if it is for family emergency or financial hardships?

    • ANSWER:
      As above, each company has its own set of rules.

      In general, most plans have a rule about how many loans can be open at the same time (1 – 2) without consolidation (“refinanced”) and how many times a loan can be consolidated (1-2) and/or within what period of time (1-3 years).

      If you have paid off all the previous loan(s), the simple answer to your question is probably that you can borrow again.

31. QUESTION:
    Can you borrow (against yourself) from a 401K rollover account?
    This is a separate account from my active 401K.

    • ANSWER:
      That depends on the company it was rolled to. Some will let you, some will not. You should refer to your contract and check under the “Borrowing” header.

32. QUESTION:
    I live in Wisconsin how do I borrow from my 401k?
    I would like to know where I go to borrow against my 401k! And how long does it take to get the money? And can you do it online? Where do I go to do it?

    • ANSWER:
      The only place you get a loan against your 401(k) is from your employer. Talk to your HR department and/or plan administrator to find out if they allow loans, and if so, what the terms are.

33. QUESTION:
    What’s the maximum amount can I borrow against my 401K?

    • ANSWER:
      It depends on your plan documents.

      For mine, it’s 50% of the value of the 401(k) (up to ,000)

      I hope that helps.

34. QUESTION:
    should i borrow against my 401k?
    I have 19000 in credit card debt. I feel like we are just spinning our wheels what does it mean to borrow agianst 401 k??? Does it pay me back. I know better than to take money out of my 401 k. what about borrowing?
    Thanks

    • ANSWER:
      First, try to earn more and spend less so the debt problem does not get worse.

      Explore other options. If you have a banking relationship, see if they would consider a debt consolidation loan. This would lower your interest rate and spread out the payments. However, you could be rejected as a poor risk. Worth trying.

      See if it is possible to borrow against your 401k. Many plans let you borrow up to half your account. You are required to pay back the loan (essentially interest to yourself). If you fail to pay back, it might be considered a withdrawal, leading to penalties and taxes.

      As a first step, you might consider lowering or stopping your 401k contributions and putting that amount toward paying down credit card debt (highest rate first, minimum payment on others).

      Best of luck.

35. QUESTION:
    Can I borrow from my 401k to help pay off debt and if so how do I do this?
    In over our heads in debt and need money fast. Can I borrow against my husbands 401k from his work to help pay this debt..I dont know what else to do. We are in a Chapter 13 so getting a regular conventional loan to help us out is not an option? How do I do this if we can do it?

    • ANSWER:
      You can, but I wouldn’t reccomend doing that. Borrowing from the 401(k) is like using a credit card that charges 40% interest. It doesn’t make financial sense.

      When borrowing from the 401(k), you will pay a 10% federal tax penalty. Plus you will have to pay them back over a 5 year period. Should your husband leave the company, the company may ask for all the money that was borrowed back thus putting you in more of a finacial mess, and on top of that, you will pay ordinary income tax. When you do pay them back, you are paying them back with after tax dollars. When your husband retires, and starts to withdraw at 59.5, he’s going to get taxed again!

      Put 00 in the bank for emergencies only.

      If I were you, you and your husband need to get on a budget. Pay the rent/mortgage, food, bills, first. List your bills from smallest to largest, then pay the minimums on all your bills except for the smallest debt. Whatever you have leftover, goes to the smallest debt. When you pay off the smallest debt, the pay the next smallest debt and so on. Cut up your credit cards and stop going to restaurants and eat at home, and pay everything in cash!

      Pick up Dave Ramsey’s book The Total Money Makeover. It help me and I’m sure it will help you.

      But never, ever borrow from your 401(k)! It makes no financial sense whatsoever!
      Good Luck!

36. QUESTION:
    I have 30k in my old 401k. What options do I have to borrow against it since I am a 1099 employee now?
    I am borrowing the money to use it for a house down payment.

    Thank you!

    • ANSWER:
      In general, you can only borrow against your 401K while you are working for the company that sponsors that 401K. You can, of course, always withdraw money from your 401K, but it is fully taxable. You might avoid the additional 10% tax penalty if it for your first home. But it still a very bad deal.

      If you took a job with another company that has a 401K plan, they MIGHT allow you to roll your old 401K money into their plan. At which point, the new plan MIGHT, allow you to borrow up to 50% or K (whichever is LESS) from the total amount in the new plan.

      As a note: If you leave your new job with a loan on your 401K, you often have as little as 60 days to repay it before it becomes taxable as ordinary income.

37. QUESTION:
    Should I borrow against my 401K to pay off debt?
    I know it’s generally a bad idea, but I have pretty high credit card debt (about 000 due to having paid for a lot of my grad school a few years back with plastic) and my creditors are all charging me over 25% interest and will not budge as far as bringing down rates. (I already asked) I can borrow that much from my 401K for less than 4% interest. I know it’s risky, like if I lose my job, but it almost seems like a risk worth taking in my case. Thoughts ?
    It might help to know that currently I’m only able to make slightly more than minimum payments. With my interest rates, it will take me many, many years to pay off the cards. I have already modeled the 401K loan and can easily pay it back in 5 years.

    • ANSWER:
      I was in the exact same position about 2 years ago. And I decided not to borrow against my 401K and try to pay off the balance on my own by scrimping and saving. Then I lost my job and I couldn’t afford to make my monthly payments on unemployment. I ended up cashing in my 401K just so that I wouldn’t lose my housing and continued making my payments and before I knew it I was worse off than I was before. I ended up with a huge tax bill at the end of following year and I was making way less money than I was before which with all the debt that I had aquired pushed me into bankruptcy. In my opinion, if you have to borrow from your 401K to pay down your debts do it. At least if you do lose your job and have to pay the taxes like a disbursement you will not have that huge debt hanging over your head and have a chance. But that’s just my opinion.

38. QUESTION:
    i need to borrow some $. In general, what makes more sense: a home equity loan or borrowing against a 401k?

    • ANSWER:
      What is your intended purpose for the loan? My initial reaction is NEITHER, without further information.

39. QUESTION:
    Should I borrow against ROth, 401K ? for downpayment?
    Condo is 270K and I’d really like to purchase by April 2009.

    I have 10K in cash, 31K in 401K, and 6K in a Roth.

    What are your thoughts on the best move? It’s that or go for an FHA condo.

    Thanks so much for your advice.

    Elizabeth

    • ANSWER:

40. QUESTION:
    Borrowing against 401k?
    My husband and I took out a loan against our 401k about 4 years ago and it recently got paid off (I’m not sure when, but just a couple of months ago I think). However, we were hit with an unexpected need to raise a large sum of money, and after exhausting all of resources and still coming up slightly short we need to know if it would be possible to borrow against the 401k so soon after it being paid off or if there is some kind of stipulation saying that we cannot borrow for “X” amount of time. Does anybody know?

    Thankyou!

    • ANSWER:
      The only federal regulation is that there can be no more than k in total 401k loans open at any time. Thus, the feds put no time limit on re-borrowing the money.

      Your company may have different rules, so you’ll need to talk to the administrator of that 401k.
      Only they can give you the real “answer”.

41. QUESTION:
    Borrowing against 401k to pay off debt in very hard times?
    My parents are looking to borrow against my father’s 401k plan to pay off debt. Extreme hard times have come and getting by is next to none.

    I have personally advice them not to do so because (1) possible penalties, (2) golden years need to remain golden, (3) hurdles have come before and each have been jumped and (4) my dad will celebrate is 61st birthday this year. He does not have much longer before either early retirement or full retirement.

    What are the facts that I can relate to my parents?
    ****PLEASE FACTS ONLY**** MANY OFTEN FEEL THE NEED TO EXPRESS OPINION (HARSH OR NOT) BUT NONE IS NEEDED!!! ***AGAIN FACTS ONLY***
    Thanks a million!!!!

    • ANSWER:

42. QUESTION:
    can i borrow money against my 401k without cashing it in?

    • ANSWER:
      Yes. Ask your HR person. They will make you pay it back through your paychecks or you will pay taxes plus a 10% penalty for early withdrawl. And not now- later- when you don’t have the money.

43. QUESTION:
    how does borrowing against 401k to fund down payment for mortgage work?

    • ANSWER:
      When looking to use your 401k for a home down payment you will most likely have 2 options. You can try to obtain a loan against your 401k, which most plans will allow a loan up to 50% of your amount invested, or you can try for a hardship withdrawal for the reason of down payment for a primary residence. Many employers offer both options. Some employers will offer only one option and yet some employers will not allow either. If you take out a loan against your 401k you will fill out the appropriate paperwork and make payments through your payroll company that go directly towards back into your 401k account. You will also pay a low interest rate on this loan, but the interest goes back into your own account. With a hardship withdrawal you will actually take the money out of your account. If you are under 59.5 then you will be penalized 10% for early withdrawal and you will be taxed on this money as “normal” income which could possibly raise your tax bracket that you fall into come tax time. Therefore, a loan is much preferred over a withdrawal and will save you a lot of money. With a withdrawal many times you will also not be able to contribute to your 401k for a specified period of time (usually 6-12 months). To find out more contact your plan administrator, your HR director or your immediate supervisor to point you in the right direction. Best of luck and check out the links below for more information,

44. QUESTION:
    Borrowing against 401K- is it dumb?
    Well – I have already done it but I am considering my options to fix this mistake.

    Scenario –
    Borrowed the money to make a 20% down payment on a house a year ago. I currently owe 33,000 back to the 401k (originally borrowed 42,000). I am paying this at 9.5%. This is interest that I am paying back to myself.

    Would it be better to open a credit line at basically prime (have offers from several lenders) with no fees. Call prime 8.25%. Now this would be tax deductible. So what is that an effective rate of 6%?

    This is where I get stuck. What’s the better option? Borrow on a credit line and pay off the 401k loan or let it stay as is? Help…

    • ANSWER:
      I wouldn’t say it was dumb but it does depend on some facts.

      We borrowed against our 401k for our down payment 7 months ago. At 8%, it was a better option than to take out a second and we are really borrowing from ourselves. Should one of us lose our job, it would be paid out of our 401k stocks and that would be covered.

      Now, we bought a house that was seriously undervalued (a previous owner had been murdered in it) so right away we gain equity. We will wait about five years, then refinance to pay off the 401k. We are also paying off the morgage at with appx 5% on top of the morgage every month to pay down the principle.

      I have a feeling that the prime that you are talking about is an adjustable? Don’t do an adjustable, EVER!

      Good luck.

45. QUESTION:
    Can I borrow from a 401k to purchase a house in Canada?
    am a Canadian Citizen. I have recently moved back to Canada after living in the USA for several years. I have money in 401k, but none in an RRSP. My question is….can I borrow against my 401k from the USA to purchase a primary house (my only house in either country) in Canada? I know I can borrow against 401k to buy a house in the USA, or borrow from an RRSP to purchase a house in Canada, but does it work the same from borrowing from 401k to purchase a house in Canada?

    • ANSWER:
      The company that manages your 401K must provide you a summary description upon request. My 401K will let me borrow up to 50% of my 401k for any reason I want. Your plan may be similar, the rules are set by the IRS.

      Grandpa

46. QUESTION:
    If I rollover my 401k to an ira after leaving my employer is there any way to borrow against it?

    • ANSWER:
      No. You should not even if you can.

47. QUESTION:
    If borrowing against 401k, do I have to pay back? No longer w/ company?

    • ANSWER:
      You don’t have to pay it back. It will be considered a distribution and you will be taxed heavily and penalized for early withdrawal.

      It’s easier to pay it back, whether it’s a 401k or an IRA (this is what you have when you leave the company).

48. QUESTION:
    borrowing against 401k plan?
    We have about 16000 in credit card debt and we feel like we cant pay them off. We have made the huge mistake in buying things that we cant afford when we were younger and it has caught up to us. We have about 50k in 401k. We have a home but already used the 2nd mortgage to pay off student loans. So we are Limited to our options. any ideas?? thanks
    We have about 16000 in credit card debt and we feel like we cant pay them off. We have made the huge mistake in buying things that we cant afford when we were younger and it has caught up to us. We have about 50k in 401k. We have a home but already used the 2nd mortgage to pay off student loans. So we are Limited to our options. any ideas?? thanks should we use debt consolidation

    • ANSWER:
      Borrowing against a 401k (as opposed to cashing it in and paying taxes and the 10% early withdrawal penalty) is actually only a moderately bad idea from a tax viewpoint. The biggest single disadvantage is that you pay interest on the amount you borrow with after-tax income, but will get taxed a second time on this amount when you withdraw the money during retirement.

      So borrowing from a 401k is bad in the abstract, but may very well be your best option if you have no other way to pay off the credit card debt quickly. I would go ahead and do it if you can honestly answer “yes” to the following questions.

      1. Are you unlikely to get laid off before repaying your 401k in full? If a layoff is possible, then you may be forced to repay the 401k loan when you least can afford it or get hit with punitive taxes and penalties that you have no way of paying.
      2. Can you live within a budget and avoid accumulating new credit card debt? It will do no good to pay off ,000 in credit card debt if you use it as an excuse to continue to live beyond your means. Unless you actually reduce your spending, it will be just a matter of time before the credit card debt is back again – most likely before you’ve even paid off the 401k loan.

49. QUESTION:
    Borrowing from 401k for first time home buyer?
    Someone told me if I borrow against my 401k to put money on a house that the withdrawl won’t be taxed as heavily as it would if I just borrowd it to spend it is that true?

    • ANSWER:
      If your employer allows it, you can borrow against (a loan from) your 401K funds. There will be no taxes or penalties as it’s a loan, not a distribution.

      You will still need to qualify for the home loan & now an additional loan to repay your 401K.

50. QUESTION:
    borrowing against a 401k?
    My brother got into some trouble with the law. He needs money now to pay an attorney & quite possibly a fine. We are thinking around ,000.00 Could he take it out of a 401k? I hate to see him borrow money or worst, charge that much on a credit card. Any suggestions? Thanks

    • ANSWER:
      Borrowing from a 401k plan is not that bad of an idea in an emergency situation. The money is yours, and it is pre-tax dollars. Your loan will charge interest – which you are paying to yourself. There is sometimes a fee to initiate a loan, depending on our 401K provider – it should be reasonable, enough to cover doing the paperwork.

      While the money is not in the plan, it is not participating in the investments of the plan. For example, say your 401K has ,000 in 3 different mutual funds and they are all up 10% next year. The money that you have out on loan won’t participate in that gain. (However, it won’t participate in a loss either!).

      Taxability of loan proceeds. If you take out a loan, and pay it back in even payments, or in a single lump sum as agreed by your 401k provider – a loan is a NON-TAXABLE event. Most employers will set up an automatic payroll deduction that pays the loan off in the amount of time the plan allows. You can’t send in extra payments to get the loan down faster, and skipping a payment will usually automatically trigger default – however, you can call and get a payoff and pay the whole thing off early.

      If you don’t pay any or all of the money back as agreed – you don’t ruin your credit (it’s your money – are you going to call yourself to collect?) however you do trigger taxes. You will be taxed as regular income any part of a loan that is not repaid plus a 10% IRA penalty.

      Many statements above are sweeping generalities based on my past experience – your 401k plan administrator will have further details associated with your exact company plan which may differ.