Check out some similar questions!

mochaholic · Jan 21, 2006, 03:33 PM

I would like to know some advice... I would like to purchase a rental property for an investment, would it be wise to burrow from my 401K? I plan on keeping the property for approx 5 years. I have 90,000 in 401K or would it be best to just get a loan from the bank? Any suggestions?

CaptainForest · Jan 21, 2006, 06:09 PM

No it is not wise.

Borrow the money from the bank.

If you go bankrupt, your money in your 401K is still there.

Also, if you borrow you money, the overall tax implications would be worse. Why pay tax twice?

mr.yet · Jan 21, 2006, 06:12 PM

Removing money from the 401k earky will also cost you a penalty and additional taxes on the withdraw.

Do use your 401k, borrow from a bank.

mochaholic · Jan 21, 2006, 07:27 PM

I guess I still don't understand... I won't be penalized I don't believe if I just borrow the money from the 401K... I will still be paying interest on it but it is interest that will go back into the account? Is there still a tax disadvantage by doing that?

slym34 · Feb 19, 2006, 07:16 PM

What type of interest rates are you making on your 401k vs what you'd be paying on interest on the investment house?
Assuming there are no penalties for withdrawing from the 401k that is how I'd look at it..
Though I thought you only avoided the 401k early withdrawal if you were buying a primary house?

Fr_Chuck · Feb 19, 2006, 07:43 PM

If you "borrow" against your 401K, you will first lose the interest that you would normally get on the money. ( not sure about yours but I make well over 10 percent on mine, almost 16 pecent last year.
I have one account on safe mode that only gets 3.75 but the ones I have in Vangard funds have been doing great.

So anyway, you will first lose the interest you would normally get.
Then you will pay what ever the contract interest rate is on the money.

So if you would normally get lets say just the 3.75 on your savings, you would lose that. If you had to pay 4 percent interest on your 401 money to borrow it, you would be both losing and paying, so the money is costing you 7.75.

So you need to take the rates you are making and the rate you would have to pay and compare that to the interest rate that you would pay at the bank.

But as the other person also said, if the money is borrowed from your account and you lose the investment for some reason, your money is still gone

talaniman · Feb 19, 2006, 08:43 PM

You can borrow on your 401 k and repay the debt plus interest at a lower rate back into your account, no matter what happens to the rental property you will still have to payoff the 401k loan and the assigned interest except early payoff will result in less interest but no penalty.Any proceeds should be used to pay for your 401k loan as the interest would more than likely be more than the bank.The interest is your money and will earn interest in your 401k account.In a case like this you are the bank.The downside is that any thing that will affect you mortgage on the house will make it difficult to repay your loan and could saddle you with two hefty payments also rental property must be maintained and my experience with renters it maybe almost 3 years before you get any return on this property and you would bear any repairs that have to be done. I would be hesitant to borrow from my retirement fund unless the mortgage was so low it would not put me in a double trick bag,mortgage payment -401k loan.Pay off the house and make the 401k payments sell he house later.:cool:Ireally don't think your plan will alow this check with you administrator

barron · Mar 2, 2006, 06:53 PM

Your 401K will restrict you to borrowing up to 50K and typical payback time is 5 year. If you borrow for a primary residence you can borrow more than 50K and more than 5 years.

I borrowed on my 401K to purchase a house bought at auction. Due to the age of the house (built in 1890) and condition (run down by current owner, my cousin), getting a loan would have been next to impossible. Now that the house is cleaned up, and fixed up I can qualify for far more than the 42K I paid on it.

The house was my grandparents therefore priceless to me.

Beauchpe · Mar 2, 2009, 02:41 PM

I have used my 401k and myself directed IRA to buy numerous properties. It's the only part of my 401k that has kept me from losing my shirt during the past few months
See my blog
ExtremePerspective: Why Not Borrow Against 401k?
Or this website
Real Estate Loans

EAM · Feb 17, 2010, 12:25 PM

In interest on money borrowed from a 401K to purchase rental property deductible on Schedule E?

ebaines · Feb 17, 2010, 01:23 PM

Originally Posted by EAM

In interest on money borrowed from a 401K to purchase rental property deductible on Schedule E?

No.
Since the interest you pay is to yourself, it seems pretty clear that you can't deduct it as an expense - otherwsie you would also have to declare the interest as income.

DebraAndre · Jun 21, 2010, 05:21 PM

I'm 60 and want to take a full distrubtuion from my 401k to pay off my rental and then carry the contract for my renters to buy the house at 6.5%. The amount is 200,000. Their payment will be approx 1600.00 per month. I'm pretty sure I cannot get that much from the market. What do you think about that scenario?

ebaines · Jun 22, 2010, 07:37 AM

First - please do not tag a new question onto an old thread. However, to answer the question - it depends. I'm sure you're aware that you will pay income tax (federal and state/local, if applicable), and this large a withdrawal will put you in a pretty high tax bracket. Whether it's wise to wipe out your retirement account to make a 6.5% return I can't say, as it depends on what other savings you have to live off for the next 30 years or so. At the very least you need a backup plan if the buyers default on the loan you are making them and you must foreclose - you have other cash flow investments that you can live on while continuing to carry the property (real estate taxes, maintenance, etc)?