We just dropped an Invest2FI episode featuring Nick Coulter, our lead agent in San Diego and he mentioned in order to buy property #2 he took out a loan against his 401K.
When I started investing in real estate all my net worth was tied up in my 401K and either I didn’t know I could take a loan against it or I was afraid to.
So, let’s talk about how to take out a loan on your 401K and some of the pros and cons. But wait, before I get into this, I’m not advising you to take a loan on your 401K just to pull the money and blow it on a vacation, I’m encourage you to consider can you leverage that savings to another, higher returning, investment!
- Check your plan. Not all plans allow loans, so it’s crucial to confirm eligibility.
- Typically, your max loan can only be 50% of your vested balanced or a specific dollar amount.
- You’ll have to apply for the loan and outline exactly how you’ll be using the money.
- Repayment rules vary, but typically it’s a standard payroll deduction over a set period of time. Typically, 5 years.
Bonus consideration: If you’re taking a loan for your primary residence terms may be more favorable!
Pros of this strategy:
- Avoiding external lenders: this can save you time and eliminate the need to meet specific eligibility criteria.
- Competitive interest rates: typically, rates are lower compared to traditional lenders. And because you are essentially borrowing from yourself, the interest payments you make on the loan go back into your own retirement account.
- Flexible repayment schedule: depending on your plan’s terms, you can choose a repayment schedule that aligns with your investing strategy.
And of course, there are potential cons to consider:
- If you leave the job your loan may become due immediately. Failing to repay to the specified terms can result in penalties or taxes.
- Make sure you’re aware of all the hidden fees. There could be origination fees or administrative fees that make the loan unfavorable.
- Opportunity cost. Be sure you understand that you’re missing out on potential investment gains during the repayment period. The borrowed amount is no longer invested in the market.
**Disclaimer** The information here is a general overview, specific rules and penalties are based on your employees plans. Consult with your plan’s administrator or financial professional for accurate information!
While I’m not a fiduciary, I am a real estate agent, so if you need advice on the market or want to look at some properties, hit me up! I’d love to help you get in the game or help you grow your portfolio.