Has anyone borrowed against their 401K to get started in this business? I would imagine if so, it was for a fix and flip as the loan needs to be paid back. I’m interested in hearing from anyone on this topic.
Yes, very similar idea as using a HELOC. Much better rates that using HML, but more of a risk because of the penalties if you can’t pay it back.
Another strategy is to roll over to a self-directed IRA. Any profits go to your IRA tax-free.
I would roll it over to an self-directed IRA. That way you can control the payment terms.
Borrowing against your 401k can be attractive given the ease of the process and the attractiveness of the interest rate you are paying to yourself. But beware; as others have mentioned should the deal fall apart and you not repay the funds there are IRS penalties to be had. Also, do not forget to consider the opportunity cost of using 401k funds. While you may be paying yourself 5% interest on the funds if the market that your funds had previously been invested in goes up 20% you just lost 15% to opportunity cost.
Thanks.
I know this isn’t an investing forum, but what do you mean by roll over to a self-directed IRA. Roll what over?
You liquidate the 401k funds and transfer the cash to a self-directed IRA. You then direct the custodian to invest the cash in your investment.
And by liquidating the funds, that means pulling ALL of the funds from the 401K and investing in the IRA, thereby “closing” out the 401K. Thus it is not a loan that needs repayment? Is that correct?
It’s not a loan. It’s an investment. You can’t just keep the money. Any investment return is put into the IRA, but you control when that happens.
This is not my area, so I could be totally off on this one… I thought you cannot roll over your 401k while you are employed by the company. You would need to wait till you change jobs to take it out isn’t that correct?
That is correct. If you are still working for the company, you can usually take a loan out for up to 50% of the amount in your 401k, and then you can also do a hardship withdrawl cash out of up to 10,000.
The specifics depend on your employer, but most fall along these guidelines. The only way to get to the last of the money is to quit the company.