Need Money From Your 401(k)? Borrowing May Be Better Than Withdrawing

I speak with many homebuyers who have substantial money in their 401(k), but are short on cash for a down payment, closing costs, improvements to a new home, or other expenses. One of the first things I tell them is: before you withdraw money from your 401(k), find out whether your plan lets you borrow against it and the difference can be huge.

Option 1: Taking Money OUT of Your 401(k)
When you take a traditional 401(k) distribution, you may owe ordinary income taxes on the money you withdraw. If you are under age 59½, you may also owe an additional 10% early-withdrawal tax unless you qualify for an exception. For example, assume someone needs $50,000.
If they withdraw $50,000 from their 401(k), that $50,000 could be added to their taxable income. Depending upon their tax bracket and circumstances, they could potentially lose a significant portion of that money to federal and state taxes, and possibly an additional 10% early-withdrawal tax.
Even worse, the $50,000 is no longer sitting in the retirement account growing for the future. That can make a $50,000 withdrawal much more expensive than it initially appears, and many will discover that they will have a tax bill at the end of the year of $15-20K. 

Option 2: Borrowing Against Your 401(k)
Many 401(k) plans allow participants to borrow against their account. Under current federal rules, the maximum is generally the lesser of $50,000 or 50% of your vested account balance. Your particular employer’s plan determines whether loans are available and can impose additional requirements.
A properly structured 401(k) loan generally isn’t treated as taxable income when you receive the money.
Instead of permanently taking the money out, you borrow it and make payments back into your own retirement account, and those repayments include interest.
Think about that for a moment. If you borrow money from a bank, you pay interest to the bank. With a 401(k) loan, your payments, including the interest charged under the plan, generally go back into your own 401(k) account. 

How Long Do You Have to Pay It Back?
Most 401(k) loans generally must be repaid within five years with payments made at least quarterly. An important exception applies when you borrow the money to buy your principal residence. In that situation, the plan may allow a repayment period longer than five years.
Every employer’s plan is different, so check the exact terms of your 401(k). 

Why This Can Be So Valuable for a Homebuyer
Imagine you have plenty of retirement savings but don’t want to liquidate those assets permanently, but you need another $30,000 or $50,000 to:
Increase your down payment
Cover closing costs
Pay for improvements after closing
Keep more money available in your bank account
Make your purchase strategy work
Instead of taking a taxable distribution, it may make sense to explore whether borrowing against the 401(k) achieves the same objective without the same immediate tax consequences. 

But There Is a Catch
A 401(k) loan isn’t free money. When you borrow the money, some of those funds may no longer be invested in the market, so you could miss investment gains while the loan is outstanding.
Please note –
If you leave your employer, your plan may require you to repay the outstanding loan.
If you don’t repay a 401(k) loan according to the plan requirements, the unpaid balance may be treated as a taxable distribution. Depending on your age and circumstances, an additional 10% early-distribution tax could also apply.
So, you need to think this strategy through carefully. 

My Advice Before Pulling Money From a 401(k)
If you are considering using retirement money to purchase a house, don’t automatically request a withdrawal. First, call your 401(k) administrator and ask:
"Does my plan allow 401(k) loans, how much can I borrow, what is the interest rate, and what are the repayment terms if I’m using it to purchase my primary residence?"
That one phone call could potentially save you thousands of dollars in unnecessary taxes. Some situations call for a withdrawal, and others call for leaving your retirement account untouched. Still, when someone needs temporary access to their retirement funds and can repay the money, I would absolutely investigate the 401(k) loan option before taking a taxable withdrawal.
Every person’s tax and retirement situation is different, so speak with your CPA, financial advisor, and 401(k) plan administrator before deciding. And if you’re considering using 401(k) funds for a home purchase, give us a call before moving the money. We can review your entire financing strategy and determine how much cash you really need before you make a decision that could have long-term tax consequences. 

Interest Rates
Do we even wanna talk rates? A little better this week!  

Loan Programs Snapshot

• Government loans (FHA/VA/USDA): in the low  7’s –
• Conventional (≤ $832,750): in the 7’s
• High-balance: in the 7’s
• Jumbo: In the 7’s
• Bridge Loans: 8.290%

Additional options:

• Bank statement loans (10% down+)
• P&L loans (20% down, no bank statements)
• 0% down options (620+ score)
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• Buydowns Available (3/2/1, 2/1, 1/0)
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• Construction Loans
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Rates subject to change without notice.

Condo Update
Good news:
American Beauty Village West: Is FHA-approved but still on Fannie’s Naughty list for now!  

Bad news:
Nothing new!    

We love your Non-Warrantable Condo loans!!
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Also:
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