I took a loan from my 401k once, to cover some home remodeling expenses for a few months until I got my bonus. We had originally planned to wait until we had the money in hand, but the contractors were available earlier than that. I was pretty nervous about messing around with my retirement funds by taking a loan, but it was a short-term thing and seemed to make sense financially.

The downside was that my money wasn't earning income for me while I had it withdrawn (although it was earning 9% interest, out of my own pocket). The market tanked while I had the money out, though, so it probably wasn't a huge loss. Also, if I'd lost my job while the loan was outstanding, I think I would have had to pay the loan back in full immediately.

Are you considering taking a loan or a withdrawal? They're two different things. The loan I took wasn't taxed as income, but a withdrawal might be. Doing an permanent withdrawal from your 401k probably isn't a good idea. Stiff penalties, loss of retirement funds, etc. A home equity loan might be a better way to go, since you get a tax deduction.

I don't know if it's possible to take a loan from an IRA.

No, it would not be a loan just a withdrawal. Thanks for your information though I appreciate it.

A withdrawal will mean 10% early withdraw, that will be paid at tax time (you could ask, or they may already withhold that before dispersing the funds). And as you already know that taking it out means no more earnings on it. Some 401k will allow you to add back. I know you can roll over, you might be able to take it out, use it for the remodeling, then when you get your bonus put it back into the 401k or open up a IRA. You have to double check on that though.

OH, besides the 10% penalty, it will also be added into your income next year and you will pay taxes on it.

After a certain age there is no penalty is there? Already know that it would count as income and be taxed.

Do you have enough equity in your home that your bank would be willing to grant you a Home Equity Line of Credit for the amount that you need to carry out the renovation?

That would be much less complicated - and quite likely less expensive - than a second mortgage. And a second mortgage would entail required periodic (usually monthly) payments, but there's usually more flexibility with a HELOC.

joyful guy

Should be 59 1/2 I think, the age that you can withdraw with no penalty. You could do a quick search at irs.gov to double check that.

Just a second, it's more than just the 10% tax penalty. If you withdraw $10,000 you pay $1,000 penatly tax to the federal government, so you have $9,000. The $10,000 you took out also is taxable as ordinary income and that may put you in a higher tax bracket meaning that you will pay a higher rate of tax on all of your income above the next bracket threshold. You also lose the invested value of that money not just for year one, but for the whole time it would have been growing tax-free for you. 59 1/2 is the minimum age for withdrawal without the penallty. Not a good idea IMO except to address a genuine financial emergency.

I took out a 401K loan to help remodel my kitchen. I pay 5% interest which goes back into my account. If i lose my job before the loan is paid off I must pay back the loan in full or it will be taxed as income.

Pipersville_Carol

You said "The downside was that my money wasn't earning income for me while I had it withdrawn (although it was earning 9% interest, out of my own pocket). The market tanked while I had the money out, though, so it probably wasn't a huge loss."

It wasn't a loss at all. It was a gain. You paid yourself 9% interest (which is quite a high return on an investment) and the market went down, meaning that you purchased back the same investment that was liquidated to make the loan for a lower price than you sold it at. You really made out well.

Thanks, maxwell. I thought it probably worked out pretty well, but there's a lot of conflicting financial advice out there.

Another good thing about the 401k loan is that the money was reinvested in real estate (the remodel) that hopefully will have a decent return some day. So in a way I got to use that money for two different investments at the same time. Sort of.