Should I Borrow Against My 401K to Buy in SF?

Borrowing Against Your 401K to Buy in SF…..Good or Bad Idea?

With home prices continuing to creep up throughout the Bay Area, many first time buyers look to borrow from their 401K accounts in order to come up with the necessary down payment.  Depending on your situation (financially and with your employer), this can be good or bad.  Here are some of the good reasons.

First-time homebuyers indicate that “saving for a down payment” is often the number one obstacle to homeownership.  Although some Bay Area households (single and joint) manage to put money aside each month into savings, with each passing year, and as home values climb, the required down payment size grows, not to mention closing costs.  This is one reason why SF buyers sometimes borrow from a 401(k) retirement plan.

When you borrow from your 401(k), you can get the money you want for a home in as little as a week and with nothing more than a phone call or visit to your HR department.   Plus, as you “pay yourself back”, you earn interest on your loan, which can make the 401(k) withdrawal seem like a good deal.  Depending on the amount you borrow and how quickly you intend to pay it back, borrowing (in this scenario) can be a decent plan to help get you “in” the market and into a home.  With appreciation rates where they are, the market can help make up some equity for you that you can later decide to pull out (to pay back your 401K loan), re-invest, leave alone, etc.

How does it work?  When you invest in a retirement program, such as 401(k), there’s no rule to prevent you from withdrawing your money before you actually retire.  You may have a life emergency, for example, which demands the use of your retirement monies; or, you may need the money to make court-ordered payments.  These types of withdrawals are known as hardship withdrawals, and they come with a 10 percent tax penalty.
 

There’s also a provision which allows withdrawals to help with the purchase of a home. Rather than taking a hardship withdrawal, you can actually borrow from your 401(k) account with a promise to pay it back.  Arranging for this can be quick. With just a phone call and some written notes to your plan’s administrator, money to purchase a home be wired to you in as little as a week.

However, just because you can borrow from your 401(k) to purchase a home, that doesn’t mean that you should.  There are some pitfalls when you borrow from a 401(k) to purchase a home which could raise your total loan costs to a figure much higher than what you borrow.

As one example, during the period your 401(k) loan is outstanding, you’re typically prevented from making full contributions to your existing retirement plan.  This means that you could forgo up to 5 years of retirement fund contributions, which could make a significant impact on you later in life.  And, to compound matters, if your employer is one that matches 401(k) contributions, you miss out on those contributions to your retirement plan as well.  However, the biggest risk of borrowing against your 401(k) is one of the unforeseen circumstances.

Should you borrow against your 401(k) and then leave the company for any reason — including being let go — you will have just 60 days to repay the entire remaining balance of your 401(k) loan.  If you’re unable to make that repayment, the remaining balance is considered a taxable withdrawal and is, therefore, subject to a 10 percent tax.

Ultimately, borrowing from a 401(k) loan can be a legitimate long-term risk here in San Francisco, but if timed properly and handled responsibly, it can work to your advantage.    Email me anytime (email link) to learn if its the right move for you.  Borrowing Against Your 401K to Buy in SF…..Good or Bad Idea?

With home prices continuing to creep up throughout the Bay Area, many first time buyers look to borrow from their 401K accounts in order to come up with the necessary down payment.  Depending on your situation (financially and with your employer), this can be good or bad.  Here are some of the good reasons.

First-time homebuyers indicate that “saving for a down payment” is often the number one obstacle to homeownership.  Although some Bay Area households (single and joint) manage to put money aside each month into savings, with each passing year, and as home values climb, the required down payment size grows, not to mention closing costs.  This is one reason why SF buyers sometimes borrow from a 401(k) retirement plan.

When you borrow from your 401(k), you can get the money you want for a home in as little as a week and with nothing more than a phone call or visit to your HR department.   Plus, as you “pay yourself back”, you earn interest on your loan, which can make the 401(k) withdrawal seem like a good deal.  Depending on the amount you borrow and how quickly you intend to pay it back, borrowing (in this scenario) can be a decent plan to help get you “in” the market and into a home.  With appreciation rates where they are, the market can help make up some equity for you that you can later decide to pull out (to pay back your 401K loan), re-invest, leave alone, etc.

How does it work?    When you invest in a retirement program, such as 401(k), there’s no rule to prevent you from withdrawing your money before you actually retire.  You may have a life emergency, for example, which demands the use of your retirement monies; or, you may need the money to make court-ordered payments.  These types of withdrawals are known as hardship withdrawals, and they come with a 10 percent tax penalty.
 

There’s also a provision which allows withdrawals to help with the purchase of a home. Rather than taking a hardship withdrawal, you can actually borrow from your 401(k) account with a promise to pay it back.  Arranging for this can be quick. With just a phone call and some written notes to your plan’s administrator, money to purchase a home be wired to you in as little as a week.

However, just because you can borrow from your 401(k) to purchase a home, that doesn’t mean that you should.  There are some pitfalls when you borrow from a 401(k) to purchase a home which could raise your total loan costs to a figure much higher than what you borrow.

As one example, during the period your 401(k) loan is outstanding, you’re typically prevented from making full contributions to your existing retirement plan.  This means that you could forgo up to 5 years of retirement fund contributions, which could make a significant impact on you later in life.  And, to compound matters, if your employer is one that matches 401(k) contributions, you miss out on those contributions to your retirement plan as well.  However, the biggest risk of borrowing against your 401(k) is one of the unforeseen circumstances.

Should you borrow against your 401(k) and then leave the company for any reason — including being let go — you will have just 60 days to repay the entire remaining balance of your 401(k) loan.  If you’re unable to make that repayment, the remaining balance is considered a taxable withdrawal and is, therefore, subject to a 10 percent tax.

Ultimately, borrowing from a 401(k) loan can be a legitimate long-term risk here in San Francisco, but if timed properly and handled responsibly, it can work to your advantage.   Email me anytime to learn if its the right move for you.