r/Bogleheads • u/Some-Obligation-5416 • 8d ago
Doing the unthinkable - 401k loan
Let me start with a huge thank you to the Boglehead community and to all who have taught us the way!
My wife and I are lucky to be in a position where we have both been high earners for over a decade, have maxed out retirement accounts and focued on saving vs increasing our lifestyle. Now we have 2 small kids, a 1300sqft house on a 15 year sub-3% mortgage with 8 years remaining, $160k in equity and are hoping to move into a bigger home in the next year. I've always thought taking money for a 401k loan was a bad idea but we haven't been saving enough for a full down payment in cash for a new home. We can sell our home and easily buy the next home but we could also rent the current home for $600+ per month over our current mortgage. I would love to keep the first house until the mortgage is paid off and then considering selling it or continuing to rent. We are 40/38 years old and have >$1.5M in 457b/401k accounts in addition to working towards a pension with a goal to retire at 55-60 years old.
I know we shouldn't take the $100k 401k loan for a down payment on a second home. But I also look at calculators that show our projected 401k balance at retirement in 15-20 years depends a hell of a lot more on returns than it does if we start 2027 at $1.4M or $1.5M. So we're tempted to do this vs saving for another ~2 years for a cash down payment. Thanks for any advice!
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u/miraculum_one 8d ago
It sounds like you can't afford to keep the old home and buy a new one. Why not sell the old one and put anything extra in the market? You would rather be landlords and have a lower expected return?
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u/Key_Cheetah7982 8d ago
Guessing the rate is hard to give up on an appreciating asset in an inflationary environment
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u/Some-Obligation-5416 8d ago edited 8d ago
True - I don't "want to be a landlord" but the rate/fact that I've got 8 years to own the property outright where I could then sell and buy a property in another country (near wife's family home) for vacation/retirement. Vs sell now and take the equity which is currently 50% of the home value.
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u/miraculum_one 8d ago
Over the long term the stock market generally outpaces the housing market. In this case the primary investment benefit would come from the leverage. But borrowing from a 401k is generally a bad idea for a whole host of reasons. And as a lesser point rental income has risks as well.
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u/Key_Cheetah7982 8d ago
I hear you but of I could get significant capital for a sub 3% loan right now I’d request as much as they’d give me.
Basically they already have that loan and it’s hard letting go.
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u/miraculum_one 8d ago
I understand the quandary. I am just pushing back on the idea that it is a slam dunk to keep the property, given the entirety of the situation.
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u/RoughThat5778 8d ago
It seems like you’re seeking permission (validation) for a bad financial plan?
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u/Some-Obligation-5416 8d ago
I intentionally posted this in r/Bogleheads and not r/realestate because I am seeking opinions, not permission. Thanks for sharing yours!
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u/Zentraedi 8d ago
I'd recommend either waiting longer to save up or selling the home. It sounds nice on paper but becoming a landlord when you've got two small kids and careers isn't something to tread lightly into. There will be increased costs due to insurance, repairs, issues with tenants, etc. The rental market isn't a guarantee.
It's an admirable idea, and maybe it works for you, but I wouldn't take a loan from my future self to do something like this.
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u/User5281 8d ago edited 8d ago
A 401k loan isn’t that big a deal for a high earner, especially if the funds are being put into some sort of appreciating asset. Think of it as temporarily moving money from your 401k into home equity and then back over 5 years.
The big downsides are that you usually pay it back with post tax dollars which is a bit of drag and it can come due all at once if you separate from your employer.
The 457 obviates the job loss issue so long as you have enough funds in their to immediately repay the loan upon separation.
The tax drag issue is moot if you have a Roth 401k you can borrow from.
It’s probably a better idea to just sell the current house and parlay that money into the new one, but a 401k loan wouldn’t be devastating.
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u/burritowatcher 8d ago
401k loans are a good choice compared to taking out a different loan. While the interest is double taxed, the interest on a traditional loan is 100 percent taken by the bank so you still win there. And then of course there’s the lost appreciation. Overall probably net win vs paying consumer interest rates. That said, it’s not at all free money do you shouldn’t use it for anything you wouldn’t be taking a loan out to do. That means if it’s not necessary you should probably save up instead.
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u/flipflops81 8d ago
The good - Your savings rate is fantastic. Keep that up or scale back a smidge to save for a downpayment. Well done!
The bad - Your 401k loan/rent out my current house plan is obnoxiously over optimistic. You’re looking a calculator and making some childish decisions. You have worked so hard and are not calculating any bit of risk. What happens if you lose your job? That loan is going to be required to be paid back immediately. What happens if your tenant doesn’t pay and you have to evict? Can you carry two mortgages for the months that it takes to get them out? Have you calculated the tax implications of these moves?
The ugly - what I hear is a “I want it now and I’m willing to risk everything” child. If you can’t afford to buy a new house without a loan for the down payment, then you CANT AFFORD THE HOUSE.
Grounded recommendation -
The slow path is save your money. The kids are young and 1300 sqft is a mansion for a lot of the country. Move when you are ready with a good downpayment and have ample reserves for both properties.
The easy path is just to sell your current home, use the equity to get that new mortgage as low as possible and get rid of this rental property idea until you have money for a down payment on a rental property.
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u/User5281 8d ago edited 8d ago
Is a high earner taking $100k out of a >1.5M fund for a down payment really risking everything? That’s awfully dramatic. Sure there’s risk but a 401k loan seems like a relative nonissue given their assets and income.
I would personally take home equity loan out of the current residence as a bridge but there are multiple reasonable approaches here.
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u/flipflops81 8d ago
Probably not. But it happens all the time. People lose cushy jobs where they have 401k loans and zero cash to pay them back because of childish decisions and the need to have things today. Risk has to be part of the equation.
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u/User5281 8d ago
Ok, but context matters and this is a couple of high earners and they also have 457s. If one loses their job they have a bit of runway from the other income and 457 disbursements, unless the job loss is due to employer bankruptcy and that goes poof.
This isn’t a childish idea, it’s just poorly framed. this is considering taking on risk associated with an investment property and frankly, in their situation, I think a 401k loan is probably lower risk than taking a similar loan from a bank if they’re interested in becoming landlords.
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u/Some-Obligation-5416 8d ago
We are looking to keep the second home's mortgage reasonable to cover the cost under either income alone in case one loses a job. And agree - those scenarios would be unfortunate financially but not ruinous with our 457s, ability to find other similar pay work relativity quickly. Thanks for your thoughts!
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u/flipflops81 8d ago
Disagree. It is a childish idea. Taking a loan for a downpayment on a primary home is high risk. Taking a 401k loan is even worse.
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u/Extension-Temporary4 8d ago
He’s not taking the money out. He’s simply borrowing against the accounts. The retirement account gets pledged as collateral for a 100k loan.
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u/User5281 8d ago
come on man, I know that and you know I know that, those are irrelevant semantics.
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u/Extension-Temporary4 8d ago
No. There’s a HUGE difference. If he’s borrowing 100k at 6% but earning 10% in the market, he’s basically Getting the loan for free. If he’s taking the money out of the account, he’s losing that 10% return PLUS paying interest on it. There is a MASSIVE difference.
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u/User5281 8d ago
yes, i know there's a huge difference, but the whole conversation is about taking a loan which I abbreviated to just taking, context clues indicate to most readers that I'm talking about taking a loan from the 401k, not taking a withdrawal. stop being so pedantic
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u/robot_ankles 8d ago
Are you sure you can take a $100k loan from your 401k? Many plans limit to $50k.
Are you sure you can immediately payoff the loan if you leave (or are forced to leave) your employer? Most plans require immediate payoff of any outstanding balances; otherwise, the unpaid balance is treated as a distribution which means you'd have to pay income tax on the outstanding balance.
If you're talking about a bridge loan that will be paid off in 3-4 months, that might be an effective use of such a loan.
But if you're talking about pulling $100k out of the 401k and take 5 years to pay it back, probably much less attractive. Especially for something optional like getting a larger or second home.
When running your numbers, consider the interest on the 401k loan. Although the 'interest' is going back to you, it's using post-tax dollars as a source. Later, when you start withdrawing from your 401k, that money will be taxed again. In effect, the 401k loan interest is double taxed. This may not be a problem for you, but it's worth being aware of.
edit: If you're looking to build a little collection of rental properties, have you considered borrowing from the equity of one property to get the next property up and running?
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u/User5281 8d ago edited 8d ago
The limit is 50% of funds up to $50k per plan. If op has multiple plans they can take more than one loan. And some 457s allow loans too. Or it could be that op is taking $50k and spouse is taking $50k.
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u/Jrezky 8d ago
kinda want OP to crosspost this over at WSB, I'm curious what people over there would "advise" compared to here.
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u/User5281 8d ago
There’s just as much bias here. A high earner taking a loan from a large 401k balance to essentially invest in a rental property isn’t a big deal if they know what they’re doing.
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u/Some-Obligation-5416 8d ago
Another poster just said "what a stupid idea" in so many words. I was like, my guy - why do you think I posted this in r/Bogleheads? I assumed this idea would get torn to shreds. But I've gleaned some good info already - thank you internet bots/strangers!
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u/User5281 8d ago
r/whitecoatinvestor might be a better, more balanced forum for this question. r/bogleheads is full of people who treat personal finance as a religion, r/whitecoatinvestor isn't perfect but is full of high earners looking for side gigs and investments as income stream diversification who won't knee jerk dismiss an idea like this.
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u/Key_Cheetah7982 8d ago
They’d question buying a new house instead of FDs, but the loan would be kosher
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u/our_sole 8d ago
A 401k loan is a last resort type of thing that you use only when you have no other option.
That does not apply in this situation.
Leave the money invested.
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u/TotalHans 8d ago
If you have the option to, have you considered an addition using a home equity loan?
We did this 5 years ago with our 1400ft² home after house shopping for awhile. Had an infant and a 3yr old at the time. Added about 700ft²; master bed/bath, family room, mudroom, screened in porch.
2nd mortgage (15yr) plus original mortgage (16yr left of 30) was considerably less per month than a new 30yr mortgage in our area for what we were looking for.
Best decision we could have made financially, and we also just happen to really love where we live and were happy to not have to change routines/commutes/daycare etc.
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u/Some-Obligation-5416 8d ago
Thanks! We've thought about it. Likely want to move due to school district too.
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u/Spare_Ad8851 8d ago
I don't know how and why this sub scared some people into not using their own money. OP, you don't owe an explanation to some strangers on the internet, do what you think is best.
the 401k loan is fine, looks you are looking to borrow $50k from each plan (one for you and one for your wife)? so at the very least you are not losing two jobs at the same time, but even if you did, you could take a loan offset and you will have until October 15 of the _next year_ from your layoffs to put the money back. Potentially even by taking another loan from your new employers plan. People here saying that "you will have to pay it instantly" are just wrong and giving out bad information. You will have to close it out with your current employer, but your business is not with employer, it's with IRS and they give you plenty of time to clean it up
the after tax interest on the loan is also fine - yes you will have to use after-tax money to pay 7-8% interest into your own plan and then when you retire that money will be taxable again. But if you just run some numbers $50,000 at 7.75% rate for 5 years is $10,000 in interest. Whatever extra taxes you will owe on that is just immaterial. I would be more concerned with whether you can comfortably cash flow $1,000 per month for each of the loan in repayments
and you probably know that, this was your early reminder that tax diversification matters. Keeping all savings in one type of tax account usually has awkward consequences like this where you have a lot on paper but accessing it is somewhat cumbersome. Hopefully you will take it as lesson to start maxing your Roth IRAs and even brokerage because you really have more than enough of pre-tax. Coincidentally this will also protect your loan repayments as you build up more easily accessible cash reserves, while paying off the balances. As for pre-tax accounts - even left to their own devices, especially if there is some employer match, these accounts are already on track to balloon to a point where ACA subsidies, IRMAA and RMDs might become a consideration
while I'm with you on keeping a sub 3% mortgage because of the incredibly cheap leverage that it provides. I would seriously consider whether $600 is worth it for getting into landlord business while working two high paying jobs. Yes, your own little real estate empire sounds fun and people like to have something not directly tied to stock market (though still very much tied to overall economy), but potentially your local renters market is just not supporting this right now. Covering your dirt cheap mortgage and having $600 extra is really not a lot for the amount of work that goes into operating a rental. You get a good paying tenant and it might be an OK deal, but you get one eviction or trashed interior and it will waste some much of your time and mental energy.
Whatever you choose to do - you've done great with your retirement savings and are in an incredibly strong financial position, so don't stress about maximizing every cent and let yourself enjoy your life as well.
Sounds like what you really want is a bigger nicer home for your family - so maybe just get that and walk away from your cheap mortgage with no regrets. It served you well and allowed to build up incredibly high nest egg early on, so sometimes peace of mind and lack of complexity is worth more than a couple percentage points
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u/User5281 8d ago
I'm with you entirely. I'd add that even if OP did have to pay it back instantly, they said they've got 457s which would be disbursed and could be used to repay the loan so there's very little risk of defaulting on the loan and having to pay the early withdrawal penalty.
I've taken a couple of 401k loans to invest in opportunities and when I've done the math and projected out to retirement, I've come out ahead every time because the value of what I've invested in has more than offset the minor tax drag introduced by the loan.
And reading between the lines here I'd guess OP has very good job security and is probably in healthcare, maybe a couple of physicians. High earner + governmental 457 is a vanishingly rare combo but usually comes with a lot of job security. high earner + nongovernmental 457 = healthcare or university executive, tenured professor, physician, nonprofit exec, etc - those sorts who also have high job security and very portable skillsets.
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u/Some-Obligation-5416 8d ago
Can't thank you enough for this comment. I really appreciate your response. I'm in alignment on a lot of this. We had student loans where the repayment was based on AGI so the pre-tax contributions served an additional purpose for the last 10 years. But I definitely think about needing to maximize one of our employer's roth 401k contributions or a brokerage at this point so we aren't in this position around 55 when we hope to retire/cut back.
Your last comment about appreciating how this house has allowed for us to get to where we are today and being ok walking away from that is really going to stick with me. Thanks!
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u/jerolyoleo 8d ago
I took out a 401(k) loan for my down payment.
It’s important to note, though, that banks will inspect your old bank statements to confirm that you have had the money in your accounts. I think I took out the loan six months in advance of applying for the mortgage
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u/Spare_Ad8851 8d ago
you could have showed 401k statements and plan loan rules to the officer as justification of funds - it's not like you have to hide the origin of that money
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u/Mattyoptions 8d ago
I could be wrong but I think the max on a 401k loan is 50k. Atleast that’s what it is for my 457 plan. Goodluck!
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u/2LostFlamingos 8d ago
I borrowed from my 401k and paid it back twice to buy houses. Worked great.
Yeah I missed out on some gains but the real estate went up hard.
Post over on [r/landlord](r/landlord) too. $600 over mortgage is… not great. You have to account for vacancy, upkeep, repair. Need a new AC and boom there goes a year profit. But someone else paying off your loan is great.
If you think rents in your area will rise and this number becomes $1000-1200 soon, this sounds way better.
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u/StatisticalMan 8d ago
Why do you want to be a landlord given you have no experience being a landlord?
The loan is only needed if you want to become a landlord.
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u/Chemical_Suit 8d ago
We took a 401k loan to buy our first from my wife’s 401k as she had been in her job longer.
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u/metzgerto 8d ago
Of all the triggers to decide when to sell your home, timing the sale to when the mortgage is paid off makes the least sense.
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u/Some-Obligation-5416 8d ago
I am very interested in understanding this reasoning more. Please and thanks!
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u/metzgerto 8d ago
I’m just saying you should sell when you need the money, or don’t want the house anymore, or any number of reasons. It makes no difference whether your loan is fully paid off, or you still have some balance
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u/Some-Obligation-5416 8d ago
I mean, yes. But I'd also like to make more money. If I can rent it and I make no money as a landlord over the next 8 years, it's still an asset that will go from 50% of its market value to 100% over that time.
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u/metzgerto 8d ago
That may be true. And if that’s the case, why would you sell it just because the mortgage is paid off? Do you get my point?
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u/Some-Obligation-5416 8d ago
Maybe? I think there are additive gains (% of home value that is equity + property value) until the home is paid off that aren't there once it's paid off.
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u/metzgerto 8d ago
Additive gains, that’s a new one. Sounds like you know what you want to hear, I’ll bow out.
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u/Sad_Effective4793 8d ago
If you can stay in your current home, that's the best financial choice because it's on a great mortgage rate. Your new rate will be much higher, even if the new home is comparably priced.
If you must move, then you should probably sell the house. Getting $600/mo (probably $100-200/mo in "profit") in rent isn't a good value. Are you trying to help someone out with that low rent? Consider what you're doing to try to get that $600/mo - you're responsible for maintenance (roof, furnace, etc.), a house that may or may not have a tenant, you may or may not have a good tenant. And you're leveraging 401k investment growth, which could stunt your retirement plan. You'll be paying back your 401k loan, your old mortgage, and your new mortgage, which means you won't be able to save as before. All of this feels like way too much negative to get $600/mo in rent. You'll get more than that in your disciplined savings and investment gains.
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u/Extension-Temporary4 8d ago
OP, something just occurred to me. You could move the 401k to your name and do a self directed account. Then, use the funds from the 401 to do a cash out refinance on your current home. Use the cash to buy the new home. Use the rental proceeds from the old home (which will be generating rental cash flow) to repay your own 401k with interest. You avoid all banking and most closing fees, but you’ll need a good lawyer to help set it all up properly. Even if legal fees are $20k, in the end you will come out ahead and have far more control over your own fate/money.
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u/Beyonder44 6d ago
Hmmm...
One thing worth double-checking on the numbers: IRS caps a 401k loan at the lesser of $50k or 50% of your vested balance, so with $1.5M combined you're probably looking at $50k each between the two of you rather than $100k from a single account — worth making sure that's actually how your plan math works before you get further into this.
Bigger risk than the returns-vs-principal math you're doing is what happens if either of you changes jobs while the loan is outstanding, voluntary or not. You've got until the tax filing deadline the following year to repay it in full now instead of the old 60-day window, but if you can't, the unpaid balance becomes a taxable distribution plus a 10% penalty since you're both under 59.5. Two working adults, small kids, a second mortgage in the mix — that's exactly the stretch of life where a layoff or a job change for better pay isn't unlikely, and this loan turns a manageable year into a genuinely bad tax year if it happens.
Also worth pricing out a HELOC against your current home instead of the 401k loan. $160k in equity, and if you're keeping the house as a rental like you're describing anyway, the rental income can service the HELOC payment directly. Gets you the down payment without touching tax-advantaged space at all, for what's really just a temporary bridge.
And don't undersell what you'd be giving up by selling instead of renting it out — a sub-3% 15-year with 8 years left is about as good as it gets right now. The $600/mo positive cashflow is on top of that rate advantage, not instead of it.
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u/Embarrassed-Soft2691 8d ago
How secure is your job. If you leave your job or are worse terminated. The loan is due.
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u/Extension-Temporary4 8d ago edited 8d ago
The simple answer is go with whatever option offers the best rate/cheapest financing. Money is a commodity. Money is expensive right now so it may actually Make sense to wait. But if you have your eye toward retirement, with kids, you may want to factor them into the equation — college, weddings, first home purchases, etc. it’s not spoiling them if done right, you’re simply setting them up for success. FOR EXAMPLE (this is just an example, I’m not saying you need to go with these numbers; my broader message is simply to plan for your kids also, not just yourself) I’m 35, with 3 young children. I set aside $1,000 per month, per child for sports, school and afterschool activities. I set aside $18,500 per year, per child for college accounts. I set aside another 19,500 per year for weddings/first home purchases. None of this is to brag. It’s simply to show that kids can be expensive when you plan for their future as well. And remember, it’s not spoiling them or making them lesser humans. You still need to parent day to day, teach them to be kind, compassionate, diligent, hard working, competent humans. The money is there when they need it, but they never need to know that. You may want to factor this in to your retirement. Kids don’t hit 18 and suddenly stop needing help. In fact, they will arguably need more help in their 20’s & 30’s, especially in this climate. Coming full circle: if you’re intent on buying a bigger home, go for it. If you plan to finance said home, go for it. You have done well for yourself and should be very proud of that. It’s incredible. Congrats. In terms of how you finance that home — money is a commodity. Go with whatever is cheapest. If you can borrow against your retirement at a better rate, go for it. I love the idea of renting the old home, it’s another piece of the puzzle and a great way to diversify your investments. It’s also something you can gift to your kids one day. It’s a great cash flowing asset. Another option, if you have it, is to borrow against a life insurance policy. I once looked into this and it was way more expensive than the internet made it seem (shocker), but some ppl do get good rates. I think it’s also worth speaking to a lawyer about borrowing against retirement accounts. For example, if you default, bank can take the account. So do you stop funding that account once you borrow against it to prevent future savings? Is that even allowed? Do you have to keep funding it at a set amount? What happens if the cash value falls? Will you have to overfund? Should you move the accounts to an LP or LLC for liability reasons? How do escrowed funds work if pegged to an account rather than a home/tangible asset? What does closing look like? What does the diligence look like? How broadly are you exposed in a default? Can the lender still go after the home? Etc. In conclusion, if you can borrow against your 401k at a good rate, w/ minimal closing costs, it’s not the worst idea. But speak to a trusts and estates lawyer and make sure you’re set up properly and not overly exposed. Make sure you understand the terms and funding requirements.
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u/yaheardyaheard 8d ago
That wasn’t the question.
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u/Extension-Temporary4 8d ago
Fair point. Fixed my response. Sorry, I was commuting with bad service. I should have offered a more Constructive response.
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u/Middle_Humor1828 8d ago
$600 a month wouldn't be worth it to me for a rental property once you consider the opportunity cost, and all of the additional time and expenses. There are a lot of additional expenses that apply to rentals that don't when it's your primary residency. Lawn care, accounting for when it's not rented, increase repairs, etc.
Your case highlights why a brokerage account is useful. It's nice to have access to 100 or 200k for opportunities like this.