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Message
re: 401k Loans
Posted on 6/5/13 at 7:50 pm to notiger1997
Posted on 6/5/13 at 7:50 pm to notiger1997
quote:
I would still rather see someone take out a 401k loan than be stuck with 18 % interest on credit card or make late payments and fck up credit rating.
If someone has credit card debt that is significant enough to require them to take out a 401K loan to pay it off, they shouldn't be investing until they paid that shite off anyway
0
Posted on 6/5/13 at 7:51 pm to Vols&Shaft83
quote:That's a crappy provision and was fortunately not a part of my 401k plan. When they say "most plans have a provision" do you think that is anecdotal or actually supported by data? Not a shot at you - really just curious.
most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid. Even if your plan doesn't have this provision, it is unlikely that you can afford to make future contributions in addition to servicing the loan payment. Because the whole point of having a 401(k) plan is to use it is as a way to save for the future, you are defeating the purpose of having this account if you use it before you retire.
This post was edited on 6/5/13 at 7:52 pm
Posted on 6/5/13 at 8:14 pm to Bayou Tiger
quote:
That's a crappy provision and was fortunately not a part of my 401k plan. When they say "most plans have a provision" do you think that is anecdotal or actually supported by data? Not a shot at you - really just curious.
Yeah, I think this is BS. So basically they're saying if you take out a loan, you stop contributing to your retirement? Is this true when people take out auto loans, personal loans or mortgages? That's a truly delusional train of thought, IMO.
Posted on 6/5/13 at 8:15 pm to Bayou Tiger
quote:
That's a crappy provision and was fortunately not a part of my 401k plan. When they say "most plans have a provision" do you think that is anecdotal or actually supported by data? Not a shot at you - really just curious.
That's probably older data, it's depending on what provisions your employer elected with the 401K Administrator.
Again though, Even if your plan doesn't have this provision, if you can afford to pay back the loan with interest and still continue to make to same contributions, that means you could afford to either save the money outside of the 401K, or get a low interest loan at the bank, why lose the compounded interest you would have received had the money just sat in your account?
Posted on 6/5/13 at 8:24 pm to JonTheTigerFan
quote:
Is this true when people take out auto loans, personal loans or mortgages? That's a truly delusional train of thought
Your employer may or may not have that provision, it's not always the case. HOWEVER, other disadvantages include:
- Lost Investment Growth
Your borrowed 401(k) money will not be invested for your retirement for the entire time the money is outstanding from your 401(k) plan. Therefore, you forgo all potential investment gains from all borrowed funds for the duration of your 401(k) loan.
AND Before you say "dividends reinvested", you not get dividends on money that was borrowed until that money is paid back.
- Negative Tax Impact
When you pay back your loan, you do so with post-tax (after-tax) dollars. Consequently, a $100 loan repayment reduces your take-home pay by $100. Worse, when you take the money out of your 401(k) plan during retirement, you will pay tax on the same money again.
- Risk of Termination
No matter the cause, if you cease working with your current employer, your entire loan is usually due within 60 days. If you are unable to pay back the loan balance during that quick time frame, the entire amount you are unable to pay is deemed a distribution, which is likely to be subject to significant federal income tax, state income tax, and early distribution penalties.
ALL THAT BEING SAID - It's still Better Than a Distribution
While a 401(k) loan has some benefits, its significant negatives ought to be avoided except during a genuine financial emergency. Still, if your only other source of money in an emergency is an outright distribution of your 401(k) money, a 401(k) loan is the preferable option.
This post was edited on 6/5/13 at 8:31 pm
Posted on 6/5/13 at 8:27 pm to Vols&Shaft83
quote:
Again though, Even if your plan doesn't have this provision, if you can afford to pay back the loan with interest and still continue to make to same contributions, that means you could afford to either save the money outside of the 401K, or get a low interest loan at the bank, why lose the compounded interest you would have received had the money just sat in your account?
I agree with this, but if you're just using the money in your 401k as collateral and the interest you pay is going back into the plan, I don't see a big problem. If you're forced to stop contributing to your retirement to secure a loan, I think you need to rethink the situation.
Posted on 6/5/13 at 8:35 pm to JonTheTigerFan
quote:
If you're forced to stop contributing to your retirement to secure a loan, I think you need to rethink the situation.
While you don't want to stop contributing either, temporarily pausing investing, and letting the 401K sit and grow while you get out of debt quickly, is much better than losing the compounding returns by not having the money in the account, IMO.
Posted on 6/5/13 at 9:06 pm to Vols&Shaft83
The intent of my original question was to facilitate a discussion questioning the conventional thinking that 401k loans are bad and that we shouldn't do it. I beleive that they can be a great financial tool.
To respond to some of the comments:
I have never seen a 401k plan that doesn't allow you to continue contributing to a 401k while you have a loan. There is a common provision that disallows contributing for 6 months or a year after a hardship withdrawal.
If I want a guaranteed rate of return on a portion of my 401k, why not invest in a fixed loan in which I am the guarantor.
If I can borrow money at prime from myself and reinvest outside the 401k to achieve a better return, why not?
Don't assume that because someone takes a 401k loan, that they are in a dire financial situation.
I don't currently have a 401k, but when I did, I borrowed 50k at 4.5% for 5 years, I bought a foreclosure for 48k, It has been rented for the last 5 years, and recently appraised for $104k. I paid myself back and earned the 4.5%, that I would have had to pay a bank. The loan allowed me the opportunity to make a cash offer, and now I have an investment that is outside of the retirement account that allows me several tax advantages.
I think that it is important to challenge conventional thinking, and not assume that common theories apply to everyone's situation.
To respond to some of the comments:
I have never seen a 401k plan that doesn't allow you to continue contributing to a 401k while you have a loan. There is a common provision that disallows contributing for 6 months or a year after a hardship withdrawal.
If I want a guaranteed rate of return on a portion of my 401k, why not invest in a fixed loan in which I am the guarantor.
If I can borrow money at prime from myself and reinvest outside the 401k to achieve a better return, why not?
Don't assume that because someone takes a 401k loan, that they are in a dire financial situation.
I don't currently have a 401k, but when I did, I borrowed 50k at 4.5% for 5 years, I bought a foreclosure for 48k, It has been rented for the last 5 years, and recently appraised for $104k. I paid myself back and earned the 4.5%, that I would have had to pay a bank. The loan allowed me the opportunity to make a cash offer, and now I have an investment that is outside of the retirement account that allows me several tax advantages.
I think that it is important to challenge conventional thinking, and not assume that common theories apply to everyone's situation.
Posted on 6/5/13 at 9:21 pm to tigerrocket
quote:
The intent of my original question was to facilitate a discussion questioning the conventional thinking that 401k loans are bad and that we shouldn't do it. I beleive that they can be a great financial tool.
They can be a great financial tool, but not for your average Joe who isn't using it to take advantage of a great investment opportunity.
quote:
I have never seen a 401k plan that doesn't allow you to continue contributing to a 401k while you have a loan
I've recently seen them in some small companies and in a few school districts and municipal governments. They aren't as common as they were back when that Investopedia article was written I'm sure.
quote:
Don't assume that because someone takes a 401k loan, that they are in a dire financial situation.
Not everyone is in a dire situation when they take out a 401K Loan, some are make a 1st home purchase, some just want to buy a toy and have no discipline, and a very few (like you) see an opportunity that exceeds the 401K benefits and know how to take advantage.
quote:
I don't currently have a 401k
I do not either, SEPP and Roth FTMFW
quote:
I think that it is important to challenge conventional thinking
Absolutely agree
Posted on 6/6/13 at 6:41 am to Vols&Shaft83
a couple of other points:
1. regarding paying the loan back witj after tax payments: all loans are paid back with after tax dollars. The loan amount that you receive from a 401k is not taxed, so you shouldn' get to pay it back with befor tax dollars. Your gains in the 401k are taxed as ordinary income when you withdraw, so the interest you paid on the loan with after tax dollars is a gain and will be taxed the same as your other inestments.
2. as a couple posters mentioned, you don't necessarily lose the opportunity to earn on the amunt you borrow. In most plans that I have seen, you earn the interest on the loan, plus the payments are reinvested back into your chioices.
3. The negatives to borrowing from a 401k might be:
losing your job and the loan comes due and is treated as a distribution
most are a 5 year loans unless it is for a primary residence. This makes the payments high.
the interest is not deductible like a home equity might be.
you can only borrow 1/2 the balance up to 50k.
If you default it wiill cost you big on taxes, penalty, and on your retirement plans.
When I hear so called experts say "Never do this" or "always do this". I begin to question them.
Thanks for the conersation!
1. regarding paying the loan back witj after tax payments: all loans are paid back with after tax dollars. The loan amount that you receive from a 401k is not taxed, so you shouldn' get to pay it back with befor tax dollars. Your gains in the 401k are taxed as ordinary income when you withdraw, so the interest you paid on the loan with after tax dollars is a gain and will be taxed the same as your other inestments.
2. as a couple posters mentioned, you don't necessarily lose the opportunity to earn on the amunt you borrow. In most plans that I have seen, you earn the interest on the loan, plus the payments are reinvested back into your chioices.
3. The negatives to borrowing from a 401k might be:
losing your job and the loan comes due and is treated as a distribution
most are a 5 year loans unless it is for a primary residence. This makes the payments high.
the interest is not deductible like a home equity might be.
you can only borrow 1/2 the balance up to 50k.
If you default it wiill cost you big on taxes, penalty, and on your retirement plans.
When I hear so called experts say "Never do this" or "always do this". I begin to question them.
Thanks for the conersation!
Posted on 6/6/13 at 4:20 pm to tigerrocket
The loan is taxed if you are under 59 1/2 and you do not pay the entire amount back within 60 days.
You will get a 1099 Distribution from the 401K for the amount of the loan, it will be coded as 1 for an early withdrawl that goes to the IRS.
You will get a 1099 Distribution from the 401K for the amount of the loan, it will be coded as 1 for an early withdrawl that goes to the IRS.
Posted on 6/6/13 at 4:50 pm to LSUMon
quote:
The loan is taxed if you are under 59 1/2 and you do not pay the entire amount back within 60 days. You will get a 1099 Distribution from the 401K for the amount of the loan, it will be coded as 1 for an early withdrawl that goes to the IRS.
Not true with my plan. You can go up to 5 years.
Posted on 6/6/13 at 6:38 pm to LSUMon
quote:
The loan is taxed if you are under 59 1/2 and you do not pay the entire amount back within 60 days.
Only if you leave/ get fired from you job.
Posted on 6/7/13 at 11:13 am to Vols&Shaft83
It all depends on your plan. My plan at work allows for loans from 0-50k, and repayment from 1-5 years at 3.5% interest(currently). Loans do not affect our account balances and we still contribute as normal to our account. However, the interest paid goes back to the plans loan department, and not to our account. Small price to pay for keeping your balance whole, at least when the market is trending up.
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