By Greg Spears
4 ways to make borrowing from your retirement account less risky
When we moved to Pennsylvania in 1996, I wanted to buy an old house. After months of looking, we found a stone farmhouse close to my new job and in a good school district. There was just one problem: We didn’t know if we could afford it.
We hadn’t been able to sell our home in Maryland, so we didn’t have any home equity to bring to the table. When our real-estate agent saw the asking price, she declined to show us the place because it was out of our price range. She wasn’t wrong.
We drove over to look anyway. It was a stone house with big mature trees. A light snowfall made the property look like a Currier & Ives print. Our kids ran around the yard, jumping in the creek out front. We had to drive home to get our 7-year-old son into dry clothes. But in just a few minutes, we’d fallen for the place.
From the visit, I got an idea for how we might afford the property. It had a small cottage, separate from the main house, which might provide rental income that we could then use to help cover the mortgage. We still needed a large down payment, however. But I also had an idea for where to get that money. I’d borrow from myself.
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First, I rolled an IRA into my new 401(k) plan at work. Once it was transferred, I borrowed the maximum allowed from the plan–$50,000. I’d have five years to repay the loan through automatic payroll deductions. The interest rate was the prime rate plus 1%, as I recall.
Plan loans are the most popular 401(k) feature–after the employer match, that is. At any given time, one worker in eight has a 401(k) loan outstanding. Because you’re borrowing from your own savings, you don’t need a bank’s approval. It’s also easy to apply. Often, you just fill out an online form or talk with a phone representative.
There was still one hitch, however. Borrowing from the 401(k) went against the …….