401k's and investing for complete idiots

[Argonne69]

Has anyone borrowed against their 401k to buy a house? My dad has always given me sound financial advice, and recommended it saying he has done it multiple times.

 

I'd avoid it. Mortgage interest rates are still low at ~4%, and the returns in the stock market are still quite good. Heck, the S&P 500 returned over 12% last year.

[SilverBullets]

I'm not an expert, so I'll start with that. But I would only borrow against a 401k if you are in dire need of the funds. Compounding interest is your best friend in a 401k and borrowing against the plan really hinders that growth. Additionally if you leave your employer, I believe you have to pay the funds back almost immediately. If you can't pay it back, you will get hit with a withdrawal, will have to pay the taxes and a 10% penalty.

 

To me, borrowing against the plan to buy a house doesn't make sense and defeats a lot of the benefits of the 401k. Mainly the compounding interest. Especially if you are young. The sooner you have money in there, the sooner and faster and bigger it grows.

[1puttTUT]

I should probably provide some more information about my situation. I'm looking to buy a 2nd home to use as an investment property. It's a 5 bedroom, 3 bath on a great stretch of Lake Michigan beach in a very desirable area (house is currently listed at $545k, I need to get it for $500k to make it work financially). I should be able to rent it for around $5k a week in the peak season and half that in the shoulder season (and use it myself on occasion). Rental income should bring in around $20k in profit a year after paying mortgage, taxes, etc. I'm going to need to borrow $20k from about $200k currently in my retirement account (combined amount including wife $401k).

 

This means I should have the borrowed money paid back in a year tops, since I can always use my annual bonus to cover any remaining amount.

 

End game is we rent/use this place for the next 15 years, putting rental profits towards paying the mortgage down quicker, plus making some upgrades along the way. By then I should have the place close to paid off and we can either retire and live there or sell it and downsize/upgrade if desired.

 

Does that change your mind at all? FWIW I'm 37.

[Argonne69]

Still not sure it makes sense given that the stock market is doing so well. I don't think the future cashflow factors into the decision. It really boils down to paying yourself 4 to 5% interest on money that could be making 7%+. Every dollar that you don't earn is one that doesn't compound over the next 25 to 30 years until retirement.

 

Given that you're hoping to pay it off quickly, the fees associated with obtaining a loan could factor into the decision I guess. Normally a loan's fees are factored into the 15/30 year life of the loan. However, with such a short payoff period, the fees could increase the effective APR to the point where it would be higher than the return in the market.

[cdnglf]

I should probably provide some more information about my situation. I'm looking to buy a 2nd home to use as an investment property. It's a 5 bedroom, 3 bath on a great stretch of Lake Michigan beach in a very desirable area (house is currently listed at $545k, I need to get it for $500k to make it work financially). I should be able to rent it for around $5k a week in the peak season and half that in the shoulder season (and use it myself on occasion). Rental income should bring in around $20k in profit a year after paying mortgage, taxes, etc. I'm going to need to borrow $20k from about $200k currently in my retirement account (combined amount including wife $401k).

 

This means I should have the borrowed money paid back in a year tops, since I can always use my annual bonus to cover any remaining amount.

 

End game is we rent/use this place for the next 15 years, putting rental profits towards paying the mortgage down quicker, plus making some upgrades along the way. By then I should have the place close to paid off and we can either retire and live there or sell it and downsize/upgrade if desired.

 

Does that change your mind at all? FWIW I'm 37.

 

Your profit projections seem pretty optimistic to me. You didn't state your total downpayment, but presumably its <=100k. 20k of positive cash flow in year 1? Plus personal use? Sounds too good to be true.

 

Might want to revisit some of your assumptions.... in particular be sure you're not underestimating upkeep or overestimating occupancy rates.

[J_Tizzle]

I should probably provide some more information about my situation. I'm looking to buy a 2nd home to use as an investment property. It's a 5 bedroom, 3 bath on a great stretch of Lake Michigan beach in a very desirable area (house is currently listed at $545k, I need to get it for $500k to make it work financially). I should be able to rent it for around $5k a week in the peak season and half that in the shoulder season (and use it myself on occasion). Rental income should bring in around $20k in profit a year after paying mortgage, taxes, etc. I'm going to need to borrow $20k from about $200k currently in my retirement account (combined amount including wife $401k).

 

This means I should have the borrowed money paid back in a year tops, since I can always use my annual bonus to cover any remaining amount.

 

End game is we rent/use this place for the next 15 years, putting rental profits towards paying the mortgage down quicker, plus making some upgrades along the way. By then I should have the place close to paid off and we can either retire and live there or sell it and downsize/upgrade if desired.

 

Does that change your mind at all? FWIW I'm 37.

 

Your profit projections seem pretty optimistic to me. You didn't state your total downpayment, but presumably its <=100k. 20k of positive cash flow in year 1? Plus personal use? Sounds too good to be true.

 

Might want to revisit some of your assumptions.... in particular be sure you're not underestimating upkeep or overestimating occupancy rates.

 

I'd probably have to agree.

 

And not to sound mean, but if you don't have $20,000 extra in cash to put down, you probably don't need to buy a house that big, especially as a vacation home. We all know the expenses in fixing/upkeep can range in the 2-3% range of the value of the home (so you're looking at another $10M-$15M a year, of course that can vary widely), but I have a much smaller house built in the late 90's and I bet it ranges in there for me easy.

 

I work in commercial lending, and I have almost never seen a vacation home that someone rents out make them money at the end of the day (because the primo rental times are times you'll want to be there as well), especially when financing 80% of the price. It usually rents for about 50-70% of the annual expenses and these are in prime rental areas (Lake of the Ozarks off the top of my mind).

 

But with all that said, if thats the one for you, there is a value to be placed on that that we cannot quantify. Or if its an insane value for the area (don't know the market).

[Argonne69]

Would a bank give you a mortgage if $20,000, or 4% of the sales price, was a loan? Mortgages on investment properties generally require a 25% down payment, or $125,000. Borrowing a part of the down payment is usually a no-no.

[CEPick]

Has anyone borrowed against their 401k to buy a house? My dad has always given me sound financial advice, and recommended it saying he has done it multiple times.

No offense but that goes against any sound, reasonable financial advice I've ever heard. 401k is there to sit and not touch. If you want to cash it out or borrow against it then don't put it in there. Even if you have every intention of paying back, life happens. Why risk your 401k?

 

How much do you need? Buying a house is a sound investment now and it still will be in a year and in five years. Save your money up the hard way and don't raid your 401k.

[1puttTUT]

Well it looks like it won't matter because we couldn't agree to terms on the house. I'll keep shopping and saving funds. We're not in a big hurry.

 

 

[teejaywhy]

Just to be pedantic, a tax return refers the forms that are filed each year, calculating how much tax is owed. If you paid more than you owe, you get a tax refund.

 

Everyone files a return. Not everyone gets a refund.

 

 

[PixlPutterman]

Your pedantics are accepted ?

[braincramp52]

Just party like hell and work until you die. Retirement is overrated. ?

[PixlPutterman]

Can someone guide me on the proper way to put a few bucks a month into something for each of my kids? I looked at guardian Roth's, but I want to choose when to transfer ownership to them, in case they arent mature enough to handle it at 18

[devinh821]

So I've tried to read as much as this as possible and really want to thank you guys for your input on a subject I'm clueless about.

 

So the wife and I have been talking about her retirement since she is a self employeed hair dresser. Do you guys have any advice on which route we should be putting money for her? I've read a little about the independent 401k I believe they are called but they don't make a ton of sense to me.

 

Thanks!

[Altiman94]

Start with a Roth IRA. Then look into the self employed 401k options.

[USAF Retired E7]

Next question. I want to take my tax return and toss it into "savings" for a year or so.

 

Should I just toss it into my Fidelity acct and put it all in a mutual fund, or put it in a "savings" acct at my credit union.

 

This will be going towards a house in a year or so.

 

Since you need the money in the short term, I'd put it in a "safe" total market bond fund.

 

The bigger question is why are you getting a tax return? Your money should be working for you, not Uncle Sam. You're basically giving the government an interest free loan. One should adjust their withholding so that they write a small check to the IRS every year.

 

Good advice.

 

American Funds are some great mutual funds that offer about as low of fees as you will find.

 

Money market is good for access to your money if you need to use it.

 

Vanguard are great mutual funds also.

 

Stay away from Managed Accounts. The wrap fees, and added 1.5%, aren't worth the performance, as mutual funds perform as well. Managed accounts are best for the reps selling them, not the client.

[PixlPutterman]

Would a bank give you a mortgage if $20,000, or 4% of the sales price, was a loan? Mortgages on investment properties generally require a 25% down payment, or $125,000. Borrowing a part of the down payment is usually a no-no.

 

Ok, so I opened two accounts under my existing Fidelity through work, I plan on direct depositing $20 a month into each for my kids to get a head start on retirement.

 

What do I buy? I see a lot of NTF Indexs have $2500 minimums.....

 

SPAXX? FZFXX?

[Argonne69]

Would a bank give you a mortgage if $20,000, or 4% of the sales price, was a loan? Mortgages on investment properties generally require a 25% down payment, or $125,000. Borrowing a part of the down payment is usually a no-no.

 

Ok, so I opened two accounts under my existing Fidelity through work, I plan on direct depositing $20 a month into each for my kids to get a head start on retirement.

 

What do I buy? I see a lot of NTF Indexs have $2500 minimums.....

 

Does Fidelity waive the minimum when you sign up for automatic purchases? You may have to contact them.

[PixlPutterman]

Would a bank give you a mortgage if $20,000, or 4% of the sales price, was a loan? Mortgages on investment properties generally require a 25% down payment, or $125,000. Borrowing a part of the down payment is usually a no-no.

 

Ok, so I opened two accounts under my existing Fidelity through work, I plan on direct depositing $20 a month into each for my kids to get a head start on retirement.

 

What do I buy? I see a lot of NTF Indexs have $2500 minimums.....

 

Does Fidelity waive the minimum when you sign up for automatic purchases? You may have to contact them.

 

According to the site, I have to own a fund first to auto purchase more of it....which I need $2500 to get the fund

[PixlPutterman]

Any thoughts on SPAXX? FZFXX?

[BeerPerHole]

I'm actually a registered investment advisor. Just sold my business so I'm not affiliated. PM me if you want to chat. No charge.