Selling Stocks vs taking loan against 401K for buying a new home

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thriftyFaramir
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Selling Stocks vs taking loan against 401K for buying a new home

Post by thriftyFaramir »

I live in VHCOL and own a home. I am 36 yr old and my spouse is 33. I am planning to sell my house and get a bigger one.
So, I am in the process of buying a new home and then putting my current home on the market. Can't sell current home before buying a new one as I have 2 small kids and not very easy to locate family in temp housing.

I will definitely get proceeds from my existing home which would cover 30-40% of down payment on a new home. I need to somehow make the downpayment (20%) till I sell my current house. I have downpayment worth of funds in my taxable account as well as in my 401K.
So, I have an option to sell my stocks from taxable account or to take a loan from my 401K to pay for the down payment. The loan won't cover the entire downpayment but will cover 50% of the downpayment.

I am exploring the option of loan because I don't want a big tax penalty if I sell the stocks from taxable account in 1 year. I prefer doing it over the next 2-4 years and pay off the 401K loan.

I do have significant accumulations in 401K and also in taxable account and don't really fall into category who spend beyond their means.

So, what would be the issues in taking a loan from 401K? I also would like to know if there are any other options to make the downpayment.
z3r0c00l
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by z3r0c00l »

Home price, annual income, other savings, and so on will be really important in making this choice. However from a position of limited info, it sounds like you are taking on a ton of debt and risk. Do you need to buy a new home now? Selling the old place only gets you a fraction of the down payment, that doesn't sound great. Why not just save money for a few more years and do the down-payment in cash?
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mdavis6890
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by mdavis6890 »

It would be super helpful if you would specify absolute numbers rather than percentages.

Keep in mind that a 401k loan is limited to the lesser of half the balance or $50k
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thriftyFaramir
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by thriftyFaramir »

Here are some numbers.

Current market price for my home: 2M
Outstanding loan on current home: 1M
New Home Price: Around 2.8M
401K Balance: 500K.
Taxable account: 1M in equity, 200K cash
Combined Income: 600K
RlxDude
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by RlxDude »

Just a general warning to anyone considering taking out a loan on their 401K.

This is a loan that is owned and managed by your current 401K employer. Employers are very unlikely to allow you to have a loan on a 401K if you are no longer employed by that employer.

A few years ago, two weeks before Xmas, my current employer laid off ~300 engineers of which I was one, closing down an entire building of engineers, sending all those jobs overseas.

At the end of the final meeting where they were telling us about how to file for unemployment, they announced that anyone having a loan against their 401K must stop by the table in the back on the way out, as those loan balances are now due to be paid in full within X number of days. There were a ton of people in that room that immediately panicked, how would they get a new loan from a bank in a few days, now that they don't even have a job??

Unfortunately, MANY employees at this company had been lending themselves the entire amount of their house loan, thinking they were smart to be paying themselves the interest. Many employees had huge 401K balances due to a massive runup in the stock price of this company, so they started taking large loans against that balance to buy an expensive home.

Turns out that the "smart" move was a total disaster financially for these people laid off from this company that Xmas.

Think very long and hard about taking a loan out on a 401K, how sure are you that your job is totally secure, in my experience no job is that secure.
mdavis6890
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by mdavis6890 »

We’ll, your 401k loan will cover 50/420 of your down payment, so start with that. Next take the $200k in cash plus whatever other equity you’d need to sell to get there.

But this does feel like quite a stretch to be honest. I can sympathize with you as we also live in a VHCOL area.
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by nisiprius »

Strictly personal. I felt that I didn't regard my retirement savings as sacrosanct, I probably would fail to have them at retirement. I felt that if wasn't ready to leave the money in the account until retirement no matter what, I shouldn't put it in there in the first place.
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by grabiner »

Another option would be to take a bridge loan against your current home. You have enough equity to make the full down payment, and the interest on the bridge loan would be relatively low because it would be for a very short term.
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todaysBob
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by todaysBob »

I would be in same situation later this year or maybe next. My plan is to just take Margin loan from Interactive Brokers. Their interest rate is 1% right now although by end of 2022 it maybe 2% give Fed interest rate increases that are expected to happen this year.

Just make sure you keep margin less than 25-30% of the equity and set up Portfolio Margin as well.
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by TropikThunder »

RlxDude wrote: Mon Jan 17, 2022 4:08 pm Just a general warning to anyone considering taking out a loan on their 401K.

This is a loan that is owned and managed by your current 401K employer. Employers are very unlikely to allow you to have a loan on a 401K if you are no longer employed by that employer.

A few years ago, two weeks before Xmas, my current employer laid off ~300 engineers of which I was one, closing down an entire building of engineers, sending all those jobs overseas.

At the end of the final meeting where they were telling us about how to file for unemployment, they announced that anyone having a loan against their 401K must stop by the table in the back on the way out, as those loan balances are now due to be paid in full within X number of days. There were a ton of people in that room that immediately panicked, how would they get a new loan from a bank in a few days, now that they don't even have a job??

Unfortunately, MANY employees at this company had been lending themselves the entire amount of their house loan, thinking they were smart to be paying themselves the interest. Many employees had huge 401K balances due to a massive runup in the stock price of this company, so they started taking large loans against that balance to buy an expensive home.

Turns out that the "smart" move was a total disaster financially for these people laid off from this company that Xmas.

Think very long and hard about taking a loan out on a 401K, how sure are you that your job is totally secure, in my experience no job is that secure.
None of this is accurate. Many custodians allow the participant to continue making loan payments post-separation, the employer can’t stop you if it’s in the plan setup.

You don’t necessarily have to pay it back post-separation. If you don’t it becomes an unqualified withdrawal but it’s still your money. It was always your money. And under current law you have until the following year’s tax deadline to take care of it, not “X number of days”. Nobody is stopping you at the desk on the way out asking for a check. That’s silly.

Plus, there’s always been a limit on 401k loans in the first place (it’s $50,000 or half the vested balance, whichever is lower currently). Nobody was buying their entire home with a 401k loan.
exodusNH
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by exodusNH »

RlxDude wrote: Mon Jan 17, 2022 4:08 pm This is a loan that is owned and managed by your current 401K employer. Employers are very unlikely to allow you to have a loan on a 401K if you are no longer employed by that employer.
It is true that the loan is attached to the plan. When you leave, the loan needs to be paid off by the next tax due date. However, some employers will allow you to transfer the loan. This requires both the old and new employer to agree to this. (Source: my SO who did this a few years ago.)
RlxDude wrote: Mon Jan 17, 2022 4:08 pm ... they announced that anyone having a loan against their 401K must stop by the table in the back on the way out, as those loan balances are now due to be paid in full within X number of days.
This was true a few years ago. The timeline was changed recently. You have more time now, quite a bit more depending on when you took your loan.
RlxDude wrote: Mon Jan 17, 2022 4:08 pm Unfortunately, MANY employees at this company had been lending themselves the entire amount of their house loan, thinking they were smart to be paying themselves the interest. Many employees had huge 401K balances due to a massive runup in the stock price of this company, so they started taking large loans against that balance to buy an expensive home.
This is not possible. The maximum loan amount you can have -- across all of your loans, if your plan allows for more than one loan at a time -- is the lesser of $50,000 or half of your balance.

While $50k is a lot of money to contemplate paying back in a short time frame, especially after just having lost your job, no one was buying or building nice houses with these loans. Maybe a kitchen or bathroom renovation. Even in terms of a down payment, it's only sufficient for a $250k house with the traditional 20% down.
VoiceOfReason
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by VoiceOfReason »

thriftyFaramir wrote: Mon Jan 17, 2022 3:36 pm I need to somehow make the downpayment (20%) till I sell my current house.

...

So, what would be the issues in taking a loan from 401K?

...

I also would like to know if there are any other options to make the downpayment.

20% downpayment on the new house is ~$600k.

As other have said you can't borrow more than $50k from a 401k.

Your best option is #1 of the following:

1) HELOC (you have $1MM in equity, a heloc could easily get you your $600k with the least amount of risk and cost)
2) SBLOC - Line of credit against your taxable account. That with your $200k in cash would get you to $600k. Considerably more risk with this option.
Topic Author
thriftyFaramir
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by thriftyFaramir »

Some of the options suggested here like using margin, HELOC and bridge loan all sound reasonable. Thanks for the suggestions
Admiral
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by Admiral »

Just stating the obvious:

Buying a home that is more than 4x your annual income is not generally a Bogleheadish way to approach personal finance.

You've certainly got lots saved, but if one of you lost your job, it seems like you'd be in dire financial straits. Hopefully your jobs are very secure.

If you're set on spending that amount, I vote for bridge or HELOC not margin as those are "safest."
FreddyC
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by FreddyC »

This recent thread has more options to consider…

viewtopic.php?p=6444532
seawolf21
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Re: Selling Stocks vs taking loan against 401K for buying a new home

Post by seawolf21 »

thriftyFaramir wrote: Wed Jan 19, 2022 10:59 am Some of the options suggested here like using margin, HELOC and bridge loan all sound reasonable. Thanks for the suggestions
HELOC should be your best bet but check transaction costs associated with opening and closing it. HELOC can take time to setup so you may have to apply ASAP.

401k loan helps but only $50k max.
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