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401k loan for home improvement
Posted on 6/20/19 at 1:00 pm
Posted on 6/20/19 at 1:00 pm
I’ve always had the mindset of being 100% against boring from my 401k, so hear me out and let me know that I should stick to my guns
Currently live in a nice 3/2 with a partially finished basement. Basement square footage is actually larger than the living area square footage. Basement has nice y’all ceilings and is set up perfectly to add a bonus room/playroom, and a bedroom/bathroom. Moving the house from a 3/2 to a 4/3.
Because the what’s there already and what we want to add, I’m guessing it could be done for 10-15k. The appraisal value of the house would jump significantly more than that (probably 2 or 3 times)
With that return, would taking A loan from my 401k be wise? The return from home value is greater than that money would be earning in a account.
Thoughts?
Eta: 33 yo, so won’t be retiring anytime soon
Currently live in a nice 3/2 with a partially finished basement. Basement square footage is actually larger than the living area square footage. Basement has nice y’all ceilings and is set up perfectly to add a bonus room/playroom, and a bedroom/bathroom. Moving the house from a 3/2 to a 4/3.
Because the what’s there already and what we want to add, I’m guessing it could be done for 10-15k. The appraisal value of the house would jump significantly more than that (probably 2 or 3 times)
With that return, would taking A loan from my 401k be wise? The return from home value is greater than that money would be earning in a account.
Thoughts?
Eta: 33 yo, so won’t be retiring anytime soon
This post was edited on 6/20/19 at 1:03 pm
9
Posted on 6/20/19 at 1:14 pm to fillmoregandt
Do you not have equity in your house? Sounds exactly like what HELOCs were invented for.
Posted on 6/20/19 at 1:16 pm to fillmoregandt
quote:
would taking A loan from my 401k be wise?
Not in my opinion. You are getting hit with taxes on the repay money AND missing out on the growth of the funds while you are out (growth that will compound over time). That $15k will end up costing you more.
quote:
The appraisal value of the house would jump significantly more than that (probably 2 or 3 times)
Triple the value for $15k? Seems optimistic to me. If you aren’t planning to sell anytime soon it is academic anyway.
This post was edited on 6/20/19 at 1:18 pm
Posted on 6/20/19 at 1:26 pm to fillmoregandt
They will appraise below grade square footage at a lower per sq ft than upper on my experience (my home is same upper and basement).
Posted on 6/20/19 at 1:26 pm to fillmoregandt
quote:
I’m guessing it could be done for 10-15k
How long would it take you to just save this and pay for it when you can afford it? If I could just save this in a few months/reasonable time period for my purposes or get a short term HELOC, I would rather do that.
quote:
The appraisal value of the house would jump significantly more than that (probably 2 or 3 times)
Always be careful with these assumptions. Usually things that are so easy/cheap to do buyers know are easy/cheap to do as well.
401k loans paid back quickly aren't the end of the world. I would explore other options first but borrowing 10-15k from you 401k isn't going to materially change your financial/retirement outlook.
Posted on 6/20/19 at 1:31 pm to fillmoregandt
How stable is your job?
If you can't save the cash fairly quickly, what will you do if you have to pay back the 401k loan if you lose or leave your job?
If you can't save the cash fairly quickly, what will you do if you have to pay back the 401k loan if you lose or leave your job?
Posted on 6/20/19 at 1:36 pm to elposter
quote:Sure, but besides the math (after tax money) AND the potential opportunity cost (if market return higher than interest on loan you pay back to yourself), you run the risk of potentially lowering your contribution to the 401k and most importantly making it a habit moving forward.
401k loans paid back quickly aren't the end of the world. I would explore other options first but borrowing 10-15k from you 401k isn't going to materially change your financial/retirement outlook.
Yeah, not the end of the world, but for home improvement that's a no go for sure imo.
Posted on 6/20/19 at 1:57 pm to fillmoregandt
After thinking I'd never do a 401k loan I just took one out. It's less than 5% of my account balance & I'm paying myself back. It's a drop In the bucket in my overall retirement planning so I finally just said WTF and did it.
Long story short, bought a house before I sold my old house then spent a good bit of $ on reno on the new place thinking I would cover from sale of old house. It's sat on the market longer than I wanted and I was paying interest 10% or so on a CC. I'm still hoping it is just a temporary deal until the house sells, but even if it doesn't it isn't going to break me.
Long story short, bought a house before I sold my old house then spent a good bit of $ on reno on the new place thinking I would cover from sale of old house. It's sat on the market longer than I wanted and I was paying interest 10% or so on a CC. I'm still hoping it is just a temporary deal until the house sells, but even if it doesn't it isn't going to break me.
Posted on 6/20/19 at 3:17 pm to weagle99
This whole notion popped in my head when I typed this, so I haven’t done any due diligence at this point. All numbers and estimates are best guesses.
House is about 1700 sqft and appraised for about $206 sqft
1700 * 206 = 350200
If I add 250 sqft of living space
1950 * 206 = 401700
Difference of +51,500
Again, it’s a pure guess that I could do the work for 15k, but that’s where my numbers are
House is about 1700 sqft and appraised for about $206 sqft
1700 * 206 = 350200
If I add 250 sqft of living space
1950 * 206 = 401700
Difference of +51,500
Again, it’s a pure guess that I could do the work for 15k, but that’s where my numbers are
Posted on 6/20/19 at 3:21 pm to fillmoregandt
quote:
it’s a pure guess that I could do the work for 15k
If you are guessing I would bet it's going to be considerably more than thay unless you have experience in the are. Also, if you can afford 350k worth of house you should be able to save 15k worth of cash pretty quickly if you wanted to. At the very least, you should be able to finance it in a better way than dipping into your retirement, whether than be HELOC, 0% intro credit card, etc.
Posted on 6/20/19 at 3:21 pm to castorinho
I took out a 401k loan last year when I bought a new house. The reason I did this was so I didn't have to sell my old house first.
Opportunity cost can be mitigated. I didn't sell any stocks in my 401k to do it. I sold bonds; so my stock exposure was the same.
While yes you're paying double tax on the interest paid (not the principal); at least the interest is going to yourself and not a lender.
Opportunity cost can be mitigated. I didn't sell any stocks in my 401k to do it. I sold bonds; so my stock exposure was the same.
While yes you're paying double tax on the interest paid (not the principal); at least the interest is going to yourself and not a lender.
This post was edited on 6/20/19 at 3:22 pm
Posted on 6/20/19 at 3:24 pm to gpburdell
quote:
While yes you're paying double tax on the interest paid (not the principal); at least the interest is going to yourself and not a lender.
Now that is one hell of a spinzone
Posted on 6/20/19 at 3:27 pm to TorchtheFlyingTiger
quote:
pay back the 401k loan if you lose or leave your job?
Not all 401ks require you to pay it back immediately if you leave the company. Mine doesn't and that's why I wasn't as worried in taking out a loan.
Posted on 6/20/19 at 3:30 pm to gpburdell
Taking a loan means paying pre-tax money back with after tax money and then paying taxes on it again upon disbursement.
Also, if the loan isn’t paid back on time it is penalized by the IRS as an early withdrawal.
Not shooting down loan ideas per se just putting the info out there.
Also, if the loan isn’t paid back on time it is penalized by the IRS as an early withdrawal.
Not shooting down loan ideas per se just putting the info out there.
This post was edited on 6/20/19 at 3:33 pm
Posted on 6/20/19 at 3:38 pm to fillmoregandt
quote:
Sounds exactly like what HELOCs were invented for.
first response nailed it
Posted on 6/20/19 at 3:39 pm to weagle99
quote:
Taking a loan means paying pre-tax money back with after tax money and then paying taxes on it again upon disbursement.
Only the interest. It's a misconception that you're paying the principal back with after tax money. You can google this.
Posted on 6/20/19 at 3:41 pm to weagle99
Good comments all around.
Honestly, would probably go the heloc/Heloan route, since equity is not a problem. Just wanted to explore the idea of ‘borrowing from myself’ rather than the bank (though it’s still getting paid back regardless)
Honestly, would probably go the heloc/Heloan route, since equity is not a problem. Just wanted to explore the idea of ‘borrowing from myself’ rather than the bank (though it’s still getting paid back regardless)
Posted on 6/20/19 at 3:54 pm to gpburdell
quote:
It's a misconception that you're paying the principal back with after tax money
Are you sure about this? Not my experience with a small loan years ago nor what I have read.
This post was edited on 6/20/19 at 3:57 pm
Posted on 6/20/19 at 4:18 pm to weagle99
https://thefinancebuff.com/401k-loan-double-taxation-myth.html
Here is an easy to way to see it. Let say you take a loan of 10k. That 10k goes in your checking acccount and it's a non taxable event as far as the IRS is concerned. Then lets say you never spend the money and use that same money to pay back the loan in 1 year. Let say the interest due is 500.
So you pay the loan off with 10,500. The 10,000 was never taxed when you got it. Even if you spend the money and use other money to pay it off doesn't matter; that's just mental accounting. That 10,000 will be taxed in the future whenever you retire and withdraw it. Now the interest of 500 you added has been taxed before and will be taxed again when you withdraw it.
Here is an easy to way to see it. Let say you take a loan of 10k. That 10k goes in your checking acccount and it's a non taxable event as far as the IRS is concerned. Then lets say you never spend the money and use that same money to pay back the loan in 1 year. Let say the interest due is 500.
So you pay the loan off with 10,500. The 10,000 was never taxed when you got it. Even if you spend the money and use other money to pay it off doesn't matter; that's just mental accounting. That 10,000 will be taxed in the future whenever you retire and withdraw it. Now the interest of 500 you added has been taxed before and will be taxed again when you withdraw it.
Posted on 6/20/19 at 4:38 pm to gpburdell
quote:
Even if you spend the money and use other money to pay it off doesn't matter; that's just mental accounting.
I need to digest that article, but for me to use other money to pay the $10,000 it will take $10,000 + taxes paid to get the $10,000, no? Say like $10,800 gross to get the $10,000 net.
So in 2019 I will have paid $800 in taxes to get the other money $10,000 and then on the disbursement pay taxes again (which would at that point be a wash with pretax contributions).
I’m not trying to be argumentative, just discussing.
This post was edited on 6/20/19 at 4:40 pm
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