401k for first home...reasons not to use.

can anyone tell me why someone would not want to use their 401k fund when purchasing their first home? even though you have to pay it back…your loaning yourself your own money…and then paying back yourself this money.

any takers?

I wonder if you could roll it over to a self-directed IRA and deed the home in the name of your IRA. I think you would not face penalties or taxes for withdrawal, plus, there would not be anything to pay back unless you would want to for liquidity reasons. This certainly should not be construed, interpreted or in any other way understood to be valid legal advice.

you cannot use a retirement account to buy a house that you will live in. similarly you cannot use it to buy or sell property to yourself. thats illegal.

you should use it to buy your own home. according to “value investing in real estate” which is a great book and a few others including ‘bull!’ by maggie mahar, most people make only 6% over a 20yr period in the stock market. this is probably the same interest you’d pay yourself if you borrow from the 401k.

i’d do it in a heart beat if i could afford to pay it back.

You can invest in real estate with your self-directed IRA. I have been since 1996. Go to www.trustetc.com for free three reports on using your IRA to invest. They also hint that you can invest in real estate with your 401k but give no details. Also sketchy is whether it can be for a primary residence. You need to further search for the answers. The holders of your 401k, I bet, have invested your money in real estate.

I used the 401k to put a down payment on the home when I used to work for a company. Fidelity let me take two loans. One was a loan that is for general purposes that I used to pay down debt. The other was for putting money down as a down payment on a duplex. Everything was normal and above board, so this is not an exception. The mortgage broker knew what to do and showed where my funds were coming from.

They had limitations and required that the funds be used for a down payment. I don’t remember what type of documentation I had to provide. The loans did not show up on my credit report, but I did have to report them as debt when I went for financing.

The down side to getting these loans is: 1) they reduce what you have in your 401k so your money is not working as hard for you. 2) If you leave the job, the loan goes into default unless you pay it back within a certain period of time…I think 90 days. Otherwise, it gets counted as income AND you have to pay penalty fees.

Dee is right there are 2 drawbacks:

  1. instead of the money growing with the stock market, it is out in your house. But you say but I pay myself back with intrest, that intrest is actually additional savings that you put into your 401k, so why are you not putting that extra in it already?
  2. If you leave the company, you will have to pay the loan back while you are without a job.

what about using 401K money for rehabbing. I’ve been thinking about by a fixer upper and using my 401K to fund the rehab.

What do you think about that?


You need to plan any money you get, whether you get it from loans, savings or retirements. When you look at using 401k money, you need to look at it from the standpoint that 401k money is retirement money. Retirement money is retirement money. That is like taking the money for your mortgage and spending it on food. You can do it, but you should have a plan for replacing it before you need to pay the mortgage. I would keep retirement money in that fund, unless I am planning to use the property I buy or rehab to fund my retirement in lieu of my 401k.

I’m with Bluemoon on this one…retirement money is for retirement. I personally would not use any of my retirement funds for REI.


The fact that the interest you pay on the 401k loan is “paid to yourself” can be a luring benefit. However, something most people don’t realize or think about is that they are actually volunteering for double taxation. How is this you ask? Well, the money that you use for the loan was put into the account as PRE-tax money. So you did not pay money on this when you put it into the 401k.

When you take out the loan, you are not taxed on the disbursement. However, the money that you use to pay it back is AFTER tax money. So the money you are using to pay back the loan is taxed before you pay back the loan. Now, because the 401k is a tax-deferred vehicle, when you do finally pull out the money you will be taxed on it.

So let’s review. You put 10k into your 401k. You borrow 5k. You then pay back the 5k using $6945 (presuming a 28% tax bracket). So far it has cost you $1945 extra to pay off the loan and that is if you were to borrow at 0% interest. When you retire and start taking disbursments, you will be taxed on the disbursement. Lets just say you are now at the 15% tax bracket at retirement. When you pull out 5k, you will pay $750 in taxes. So that is a total cost of $2695 just in federal taxes to borrow 5k.That comes out to 54%. OUCH! I will leave you to compute the cost of interest.

Still think it is a good idea?

NOTE: I am not a tax advisor and the above is not tax advice Numbers are for example purposes only and could be wrong, so please do your own calculations.

shame on any real estate investor who’s in the 28% tax bracket!!

with the depreciation on 5 homes, i’m taking the 25k passive losses. if you have
a ton more money coming in, then you might be able to qualify for unlimited passive
losses. [and if you don’t you definitely shouldn’t need to pull money from a 401k]

I have a separate 401k thats used to invest in RE for my retirement. when i’m doing
2nd trust deeds at 36% and more i definitely don’t want to pay tax on that.

Well, if you take out 401K funds using a “Hardship Clause” to buy your 1st home, you will pay huge tax penalties on what you cash out come tax-time. However, if you buy smart, you will have recouped your tax loss by not paying RENT all dang year, lol. In 1993 we bought our 1st home ever, and we were able to raid my hubby’s 401k to obtain the down payment. The reason we did this was because it was the only $$ we had as far as a savings…yes, we got nailed for the taxes, BUT, we were not able to buy a home ANY other way at the time. Now, we have tons of equity. We had blah credit, but our realtor was a brilliant snake in the grass and got us a great deal on a court-ordered sale in a fantastic location, with a wonderful FHA loan, too! Although I know there are other options for us NOW to buy, at the time, when interest was at it’s very lowest, and programs for 1st time buyers were in place, we did what we had to do to get the property. We did good using our 401k, since there was no other option for us at the time, and we have no regrets at all. Now, I have new options available to me to purchase additional investments. Sometimes you gotta PAY to get in the game. :wink:

What do you think of this way of using my 401K?

I thought of taking a 15K loan against my 401K, less then half of my funds, so I can do I flip. This way I can fund my own rehab. I will have to pay a monthly payment for a couples months while the houses is fixed and sold. From the profit I would pay myslef back the whole loan amount and still have some cash to do the next rehab.


What do you think about my loan against the 401K? Still a NO for most of you?


I think that retirement is retirement, BUT if you can get a loan, and that will start you on your way to making substantual wealth, I say borrow it. To get started I have done some things that I would not recomment anyone else do, but it was a risk I was willing to take. I think that as access to funds to get started and you are looking to get bigger than a house or two, do it.

i’ve read a few books which showed how the 11% market return was a myth. the average investor makes 6% in the stock market over a 20 year period.
your loan from your 401k should be around 5% which isn’t too much of a hit. 1% to make a lot more in RE, definitely worth it.
just make sure its a good investment. you don’t want to lose your retirement funds!