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Borrowing from your 401k good idea or bad?
Posted on 11/29/15 at 7:09 pm
Posted on 11/29/15 at 7:09 pm
My 401k plan has tho option to borrow up to 50k from your account where interest paid back goes to yourself. I'm wanting a new vehicle and the interest rate is 4.25% which I get to keep. Only worry I have is if I take 40k out of my 401k that money isn't "working" for me anymore until I pay it back. Any of you borrow from your 401k's?
11
Posted on 11/29/15 at 7:12 pm to HogBalls
What kind of plan do you have that you can borrow against it without penalty? I have never heard of this.
Posted on 11/29/15 at 7:17 pm to HogBalls
Sounds like a terrible idea. If you're terminated, I think you only have a small amount of time to repay what you've borrowed. 60 days maybe? I could be wrong about that.
Posted on 11/29/15 at 7:21 pm to rpg37
Lots of plans offer this option.
I think it's a shitty idea though to borrow from a 401k to buy a car.
I think it's a shitty idea though to borrow from a 401k to buy a car.
Posted on 11/29/15 at 7:24 pm to rpg37
A lot of 401k plans do.
Yours probably does as well, you just don't know about it.
And to the OP, it can be a good idea if used for the right purpose. I just took a loan out of my 401k for a first home purchase.
But for a car? Hell no
If you want to self finance a car, get a HELOC and deduct the interest.
Yours probably does as well, you just don't know about it.
And to the OP, it can be a good idea if used for the right purpose. I just took a loan out of my 401k for a first home purchase.
But for a car? Hell no
If you want to self finance a car, get a HELOC and deduct the interest.
This post was edited on 11/29/15 at 8:12 pm
Posted on 11/29/15 at 7:25 pm to DownSouthDave
Our plan allows a loan of up to 50k. To borrow that 50k you must have 100k in your 401k so if you are fired or something happens to you the loan is covered. The only thing I have to pay is a 50$ loan processing fee that I don't get back. All other interest I pay back over the 60 payments goes into my 401k and I get to keep it.
Posted on 11/29/15 at 7:28 pm to Volvagia
Yea but you said you "cashed" out a portion of your 401k for a home. I'm not cashing anything out of mine, just borrowing from it. Big difference.
Posted on 11/29/15 at 7:49 pm to HogBalls
Marco Rubio says go for it. He cashed out to buy hats and yard signs for his campaign.
Posted on 11/29/15 at 8:11 pm to HogBalls
Ok, Mr. semantics, it wasn't clear from the rest I was referring to a loan? It turned a portion of retirement assets to liquid cash in my bank account.
The fact that there will be a paycheck deduction to pay it back doesn't change that fact.
Doesn't make you incurring a potentially huge opportunity cost a good idea just so you can get that 40k car.
Which you'll probably pull back out the money a few years after paying it off to buy a new one
Cash, HELOC, or financing for your car. Leave your retirement assets alone. It would be one thing if you totaled your last car, we're broke, and needed reliable transportation for work. But you would pick up a car worth half that amount for that.
The fact that there will be a paycheck deduction to pay it back doesn't change that fact.
Doesn't make you incurring a potentially huge opportunity cost a good idea just so you can get that 40k car.
Which you'll probably pull back out the money a few years after paying it off to buy a new one
Cash, HELOC, or financing for your car. Leave your retirement assets alone. It would be one thing if you totaled your last car, we're broke, and needed reliable transportation for work. But you would pick up a car worth half that amount for that.
Posted on 11/29/15 at 8:25 pm to HogBalls
Bad idea. Get a car loan.
Posted on 11/29/15 at 8:35 pm to Volvagia
My plan also offers a hardship withdrawal where you can get into your 401k with a penalty but you don't have to pay it back. One of the hardship requirements is a new home purchase. I thought you had done this. Sorry if I miss understood you.
Posted on 11/29/15 at 9:53 pm to HogBalls
quote:quote:
My 401k plan has tho option to borrow up to 50k from your account where interest paid back goes to yourself. I'm wanting a new vehicle and the interest rate is 4.25% which I get to keep. Only worry I have is if I take 40k out of my 401k that money isn't "working" for me anymore until I pay it back. Any of you borrow from your 401k's?
The most important information to answer your question is missing, what are your other options?
If you can get a low APR car loan I would approach it that way, if it is going to cost you over 4.5% I would certainly recommend taking out the "loan" from your 401k.
It is a case by case thing and when it is over and done you could have either won or lost depending on stock market performance. I would recommend going as short a period as you can handle with the 401k loan though.
I took out a 401k loan several years ago for a new truck back when interest rates were high and watched a market correction pummel the rest of my 401K holdings. Whilst the part I had borrowed was ticking along nicely collecting the interest I would have otherwise been paying a bank.
Long answer short, if you believe the stock market is going to be flat or trend downwards and don't have a better option take out the 401k loan. Otherwise...
Posted on 11/29/15 at 10:27 pm to cave canem
I guess the main question I have is will I get a larger return on my money by paying myself back the 4.5% interest over life of loan or leaving it and let it work for me? Just seemed like a good idea to borrow from yourself and pay yourself back the interest instead of a bank.
Posted on 11/29/15 at 11:14 pm to HogBalls
Another consideration not mentioned so far, if you have to leave your current employer for any reason the loan becomes a taxable withdrawal with the associated penalty.
Posted on 11/30/15 at 3:43 am to HogBalls
quote:
I guess the main question I have is will I get a larger return on my money by paying myself back the 4.5% interest over life of loan or leaving it and let it work for me? Just seemed like a good idea to borrow from yourself and pay yourself back the interest instead of a bank.
Legit question but another way to look at it is this, auto loans are available for far less than 4.5% if you have decent credit. There is also nothing stopping you from putting the difference into your 401k if you wish.
for example if you can get a 1.9% car loan raise your contribution level a bit if you like.
Check the fine print on your plans docs and make sure a portion of the interest is not going back for admin fees, some plans also sequester the money until the loan is paid back in full hence zero earning potential for the entire term.
There are far to many variables to be considered for there to be a one answer fits all for this question.
Also what the poster said above is not necessarily true, if you continue with your payments there is no law that makes it taxable if you change jobs. If you quit paying and the balance is treated as a withdrawal taxes would be due.
Posted on 11/30/15 at 9:16 am to HogBalls
So you are basically not paying interest to the bank, and you are, at the same time, locking the current balance of the loan at all times into a 4.25% return less any fees.
Certain times, I would have gladly taken a 4.25% guaranteed return. If the market is booming though, it's not so good.
If you can get a car loan at 1.99 or something like that, I'd probably just do that. If the best you can get is 7-8 percent, then do the 401K thing, just try to pay it back faster if you can.
Certain times, I would have gladly taken a 4.25% guaranteed return. If the market is booming though, it's not so good.
If you can get a car loan at 1.99 or something like that, I'd probably just do that. If the best you can get is 7-8 percent, then do the 401K thing, just try to pay it back faster if you can.
Posted on 11/30/15 at 10:36 am to LSUFanHouston
The answer should be a definite no because of what is due if termination occurs.
Posted on 11/30/15 at 11:02 am to HogBalls
quote:
Borrowing from your 401k good idea or bad?
What is your potential interest rate if you borrow form dealership or bank?
Do you estimate you will make over that percentage in the market for your 401k?
You'll need to review your 401k plans and rules. Some have a fee to do this and some even make you pay yourself interest anyways.
Also, most 401k plans require you repay the loan in full 30-60 days after being terminated.
If you can get a good interest rate, borrow from a lender. You'll lose out on a lot of growth borrowing from your 401k
Posted on 11/30/15 at 12:10 pm to LSUtoOmaha
quote:
The answer should be a definite no because of what is due if termination occurs.
Maybe, maybe not. You get a period of time after termination to pay it back, before it converts to a taxable distribution.
If he has the ability to get the money from somewhere else (home equity loan, personal signature loan, credit union, etc) it might be ok.
Posted on 11/30/15 at 6:36 pm to HogBalls
quote:
My 401k plan has tho option to borrow up to 50k from your account where interest paid back goes to yourself.
Same here but only for home purchase. I did it short term a couple of months back. Had it repaid in less than a month when I sold an existing house. I don't think I would do it long term and I'm sure most would recommend against it.
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