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I'm currently in the process of purchasing a home. I trying to decide which would be the best approach to paying for the downpayment/ closing costs of the home. I am a first time home buyer and wanted to know if it was a good idea to borrow from my 401k?

I'm 32 years old , closing cost is 24k , I need additional 9k plus furniture money. I currently have 50k in 401k account, 50k in my company stock account and 15k savings . I am able to borrow 21k from my 401k . Should I borrow all 21k and put towards closing and use 3k of savings and save remaining liquid for furniture and other just in case items ? Should I only borrow 9k from 401k and use savings ? Should I not touch my 401k and sell my company stock and get charged capital gains taxes?

Mar 19, 2013 by R from Oakhurst, NJ in  |  Flag
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5 votes

Congratulations on your decision to purchase a home. I would recommend selling the company stock and paying the capital gains tax. Hopefully the stock has been owned for over one year to receive the lower rate. I would discourage borrowing from your 401k plan because if you were to leave the job, the loan becomes due before you leave. In addition, almost half of your investments is tied to your company which is too high. I hope you have much happiness in your new home.

3 Comments   |  Flag   |  Mar 19, 2013 from Allendale, NJ
R

So besides having to repay the balance quicky if I were to leave are there any other negative things?I'm trying to figure out what other negative things ? Also I recieve 4.25% interest on my repayment .

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Flag |  Mar 20, 2013 near Oakhurst, NJ
tyler

The early repayment is a problem; other than that, it is an entirely acceptable use of 401k. You should sell your company stock as the first option though. You don't want to rely on your co. for your paycheck and your retirement---it's not good diversification. Plus, it sounds like the stock has done very well and it wouldn't hurt to take some $$ off the table.

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Flag |  Mar 21, 2013 near Salt Lake City, UT
Tracy Scott Burke

Rino, it is important to check out the pros and cons of taking a loan from your 401(k). Here is a link to pros/cons that I would say that most financial fiduciaries agree on - http://voices.yahoo.com/pros-cons-401k-loans-5569533.html The biggest con in most of our eyes is the double taxation component.

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Flag |  Mar 21, 2013 near Harrisburg, PA

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4 votes

I'd also suggest selling some of the company stock and affirm Dan and Jason's comments to not borrow from your 401(k). Assuming you are currently contributing into your 401(k), I highly advise to continue doing so if any way possible. Good luck in your new home!

View all 4 Comments   |  Flag   |  Mar 19, 2013 from Harrisburg, PA
tyler

I love how you link some sort of study that "proves" material possessions don't contribute at all to happiness. Really? I know hundreds of people who are immensely happy because they live in a nice house in a good area and are able to send their kids go to good schools because of it. I didn't disagree with the answers in this particular case, my point was that the financial industry/racket (you being a prime specimen) has convinced people that THE ONLY THING THAT MATTERS IN LIFE is a maxed out 401k/IRA, EVERYTHING ELSE BE DAMNED! The guy above jsut wanted to buy a house--probably to make his wife happy and/or to start a family. Suddenly, that's "living a hedonistic lifestyle" in your description. If you don't spend it on shelter and/or family formation, what exactly do you propose spending it on? It's false and self interested advice. It happened to be correct in this case, but life doesn't begin and end with someone's 401k statement, and people shouldn't be bullied by this industry into enduring a lifetime of misery and penury just so they can eke out thier final 10-15 years in a fully paid for fashion.

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Flag |  Mar 20, 2013 near Salt Lake City, UT
R

You say negative return ? There is 4.25% interest paid back to my self ? ??

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Flag |  Mar 20, 2013 near Oakhurst, NJ

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4 votes

Borrowing money for a down payment to borrow money is almost never a good idea, even if it is your own funds. Not only do you have the borrowing costs on the mortgage but the 401k repayment too. That could make for a cash flow crunch, not to mention the hit to your retirement savings.

I would wait to buy a home until you have the whole down payment saved. Or, sell some company stock and pay the capital gains tax. I would sell enough so that you don't entirely deplete your savings.

You are doing well to have $50K in your 401k at age 32 plus savings, plus a $50K stock account. Keep it up.

View all 8 Comments   |  Flag   |  Mar 21, 2013 from Charlotte, NC
David L. Hoshour AIF®

Now, if the person did not have stock to sell to complete his down payment, one choice is to wait to buy until more money is saved, in which case you are right, prices may go up and interest rates may go up. Personally, I don't think mortgage rates are going up for another couple years, though prices may go up. I think people are too eager to have things now by going into more debt As a general principal, I don't think that is wise. I have also seen so many people hurt their retirement by constantly cashing out or borrowing money from their retirement plan. Another choice is to do a mortgage with a lower down payment requirement.

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Flag |  Mar 22, 2013 near Charlotte, NC
tyler

Fair enough, but I disagree in this case. I think purchasing a home/forming a family is an important enough life milestone that it can, under certain circumstances, justify a short term borrowing from retirement. This (hypothetical, since he does have the company stock to sell) case fits that profile in my opinion. Timing matters, and so does the size of the loan. He'd be using only 20% of his well funded 401k to lock in a generational low interest rate that will benefit him for decades. In my opinion, under this limited circumstance, it's an entirely justifiable use of the funds. Anyway, thanks for the back and forth.

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Flag |  Mar 22, 2013 near Salt Lake City, UT

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3 votes
Jason Hull Level 20

I'd definitely sell the company stock. Make sure that you choose the company stock which you've held longest to take advantage of long-term capital gains taxes. Never, ever, ever borrow from your 401k unless it means that you're using it to eat food. Not only do you run the risk of having the loan called as Dan mentioned, but now you're paying back the loan with after-tax money, meaning that you're going to be taxed twice on the repayment money. When you're selling the company stock, make sure that you're selling 1.2 times the amount you need. In this case, you're saying that you need $9k, so you'd want to sell $10.8k and put that $1,800 somewhere that you won't touch it so that you have the money ready when you file your 2013 taxes.

Also, don't go wild in buying furniture. You should cash flow that purchase. Don't borrow money to buy furniture. Don't sell stock to buy furniture. You'd be selling assets and purchasing (effectively) liabilities. Go to estate sales and haggle like crazy.

Once you're done with the closing of the house and settled in your house, look at diversifying out of your company stock. Think about it. You're getting a paycheck from this company AND relying on it for growth of your assets. What happens if the unthinkable happens (which happens a lot nowadays) and your company has financial trouble? You're faced with both losing your income AND losing the value of your stock, a double whammy. It's a risky position to be in.

3 Comments   |  Flag   |  Mar 19, 2013 from Fort Worth, TX
R

You say sell the stock that I've held the longest ? Current the stock is at 80 , I been purchasing it for around 7 years at $45 a share. Do I sell the stock thats closer to the current price so its less profit???

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Flag |  Mar 20, 2013 near Oakhurst, NJ
R

So its less captial gains

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Flag |  Mar 20, 2013 near Oakhurst, NJ
tyler

Don't let the tax tail wag the dog---that goes for any investment decision. Sell the stock and pay the cap gains rate---it's not going lower, trust me, so that fact combined with the outsized gains, plus the diversification benefits make it a smarter choice than the 401k route. You're lucky you have that option--most people don't.

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Flag |  Mar 21, 2013 near Salt Lake City, UT

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