401(k) is Off Limits for Home-building Self-Lending

M-5 Money

Self-Lending becomes Self-Loathing.

You’ll hate yourself later.

First, remember this. The context of this entire HomeBuildingTimeline.com project is about you ending up owning your own home, or owning your next one. Toward that goal almost everyone suffers a kind of slow burning, anxious panic, fearing that the part about “owning” may never happen. At the very least it can seem to be a molasses-slow process. Being on the verge of making a homebuilding deal work, but not being in the perfect financial condition to push past the verge, to be stalled in place, can cause a level of impatience that often leads to reckless financial contrivances.

In this case that wizardry involves finding sources of cash to use as a weapon to force an otherwise precarious money-situation into compliance with the desires of the weapon’s wizardly wielder, whether it’s wise or not. One source of cash available to many people is a personal retirement fund. Specifically, let’s address your 401(k).

This is the Self-Lending part.

For people needing that final few thousand dollars to make a mortgage work, or to pay off unforeseen construction cost overruns, borrowing against a 401(k) plan seems like an easy way to grab a few quick bucks in a hurry.

It’s easy to think, “I’ll just borrow a few dollars from the ol’ 401k, and pay it back in no time. What’s wrong with that?” What’s wrong with that is : that’s where the thinking usually stops.

Plan Operators, those who manage and make a profit from your Retirement Plan, are eager for you to borrow from yourself. They make a percentage on every loaned penny. They’re counting on you to NOT think past your immediate need. In addition, the interest you will pay back is money lost forever. Interest payments don’t end up in the retirement account. That money goes to pay administrative costs and for the living expenses and investment portfolios of those who oversee the retirement banking process.

Catherine Collinson of the Transamerica Center for Retirement Studies calls the 401(k) self-lending process a “wolf in sheep’s clothing.” Somebody is going to end up with money that used to be yours, and it isn’t you.

You cannot borrow yourself into prosperous financial security. Every aspect of the self-loaning process involves paying back more than you borrow. That’s a losing proposition. Here are some more characteristics of that process :

  • People who don’t pay themselves back in five years and are under the age of 59 1/2 are subject to 10 percent penalties for early withdrawals.
  • 401(k) plans are protected from creditors, in case of bankruptcy. However, any bank account or money, even officially escrowed or earmarked for repayment of the loan,  is NOT protected. Creditors can take the money you meant to save to pay back the 401(k) money you borrowed.
  • Investors, that’s you, who take such loans also fall behind in their savings for retirement because contributions, possibly matching ones, to the 401(k) are suspended, more often than not, until the loan is completely repaid.
  • Plan Operators will encourage you to borrow, because they make a profit from your debt.
  • Your debt will be rolled into a fund called a Collateralized Debt Obligation (CDO), which will be sold on the global stock/investment market, where someone else will make money, because you borrowed it.
  • Credit Scores are affected, adversely, by missed or delinquent monthly payments, and  by the simple existence of the loan.

A 401(k) investor, that’s you, should NEVER consider a 401(k) loan for homebuilding, even if it’s “only a little money;” even if it’s “just for a little while.” But if you go against this warning and do it anyway, you should borrow as little as possible and should resume contributing to your retirement plan as soon as possible. Of course the words “resume contributing” mean “pay back the loan.” Too often this is easier said than done. Life keeps happening. Life is unpredictable and unreliable. Life does not yield to concepts like “fair” and “deserving,” and “resume contributing.” Life is the greatest hazard to existence, not only interfering with your plans and dreams, but your ability to pay back a self-loaned debt.

Deep within the core of your being, maybe not yet in your conscious mind, you already know it’s a bad idea to withdraw retirement money, hard earned and harder saved, and then turn that safely-tucked-away cash into a new debt and a monthly payment. Then, when Life has its way with you, and your self-created wizardly financial weapon backfires, and you miss a payment, or two, or a few, and your credit score gets wrecked, and you struggle to rebuild your retirement fund, but realize too late that you caused more monetary damage to yourself in this life than can be repaired in two extra lives, which also causes you to realize that, ironically, you’re living on the verge of homelessness because you borrowed all your savings to pay for a fraction of the cost of building the home you’re about to lose, and even worse, you used up the retirement account, so you can never retire; …… well…..; This is where the self-loathing part begins, because you’re gonna hate yourself.

So, Think Twice before borrowing home-building money from your 401(k). The risks far outweigh the benefits.

Thank you,

Andy Bozeman


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