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401k Loan Questions
Posted on 7/3/25 at 10:23 am
Posted on 7/3/25 at 10:23 am
I've got a HELOC with a variable interest rate through a credit union. Current interest rate is 7.5%
I could take a loan against my 401k at an interest rate of 8.5% and pay it off. The loan calculator on my 401k Providers website says if I take the loan and continue my current contributions, it would result in a +$3k impact on my account balance at expected retirement data. I heard one co-worker say "borrow from your 401k because you're paying the interest to yourself", but his judgement on other financial matters is questionable at best.
I know borrowing from the 401k and stopping contributions is a terrible idea, but if you borrow and continue to contribute on top of making the payments, what are the drawbacks? How is this showing a positive potential impact on my future value?
I could take a loan against my 401k at an interest rate of 8.5% and pay it off. The loan calculator on my 401k Providers website says if I take the loan and continue my current contributions, it would result in a +$3k impact on my account balance at expected retirement data. I heard one co-worker say "borrow from your 401k because you're paying the interest to yourself", but his judgement on other financial matters is questionable at best.
I know borrowing from the 401k and stopping contributions is a terrible idea, but if you borrow and continue to contribute on top of making the payments, what are the drawbacks? How is this showing a positive potential impact on my future value?
6
Posted on 7/3/25 at 10:26 am to YouKnowImRight
401k loans are almsot always a bad idea, if you lose your job or quit, you're on the hook almost immediately for the full amount to pay back
Otherwise the loan is considered a distribution and taxed/penalized
Otherwise the loan is considered a distribution and taxed/penalized
This post was edited on 7/3/25 at 10:27 am
Posted on 7/3/25 at 10:52 am to thunderbird1100
quote:
if you lose your job or quit, you're on the hook almost immediately for the full amount to pay back
This is not always the case so check with your plan first. Some plans continue the loan repayment term regardless of your employment status.
Posted on 7/3/25 at 11:21 am to thunderbird1100
Is the loan a taxable event? I didn’t think it was
Posted on 7/3/25 at 11:27 am to Merica
quote:
Is the loan a taxable event? I didn’t think it was
I think he meant if you don't pay it back in full if you quit or are terminated, then it's considered a taxable distribution and subject to tax/penalty.
Posted on 7/3/25 at 11:28 am to Merica
quote:it is not...but if you leave your job, you have until the end of that tax year to pay it back...
Is the loan a taxable event? I didn’t think it was
it is a risky move but may work for some people...
Posted on 7/3/25 at 11:44 am to dcrews
Ah okay I see. Interesting this subject came up today, I had a similar question. I’m looking at an investment property that would require a 25k down payment. I’ve got the funds in my normal brokerage account mostly in the S&P. Weighing taking a 401k loan for the down payment or liquidating my stocks. With the way the market has been ripping I am split
Posted on 7/3/25 at 12:15 pm to YouKnowImRight
(no message)
This post was edited on 7/3/25 at 5:29 pm
Posted on 7/3/25 at 12:55 pm to Skippy1013
quote:
I don't believe it's true that you are paying interest to yourself.
It is true.
The "interest" payment just goes back into your 401k account.
quote:
They are making money on you, just like a bank would.
I think mine charged a nominal fee when I took out a 401k loan but otherwise your institution doesn't "make" money on the deal.
If there's a reasonable risk of job loss, then a 401k loan is very risky, but depending on circumstances it can be a very useful tool.
I took out about 80k in 401k loans split between me and my wife's 401ks in order to put the down payment down on our house before our then-current house sold so as to avoid gigantic tax hits from selling after-tax assets. We paid the 401k loans back 2 or 3 months later once our previous house closed.
Doing the 401k loan saved me 5 figures in tax bills.
Posted on 7/3/25 at 7:34 pm to YouKnowImRight
Pay the 7.5% interest to the bank or to yourself, you decide.
401k loans are not as bad as people think. Do not make a habit of doing it, but when in a pinch or trying to provide for your family and need a lump sum to purchase something expensive and needed... go this route if able.
401 (k) loans on primary residences can stretch out to 200+ months; other plans offer loans for other purchases with much less longevity. For a non-primary residence loan, like 50-70 months.
401k loans are not as bad as people think. Do not make a habit of doing it, but when in a pinch or trying to provide for your family and need a lump sum to purchase something expensive and needed... go this route if able.
401 (k) loans on primary residences can stretch out to 200+ months; other plans offer loans for other purchases with much less longevity. For a non-primary residence loan, like 50-70 months.
Posted on 7/3/25 at 9:09 pm to YouKnowImRight
I did it and even though I never lost my job and paid it back, I regret doing it. It should be a last resort attempt to get a handle on high interest debt that is drowning you every month.
I knew guys who took 401K loans to buy themselves a truck.
I knew guys who took 401K loans to buy themselves a truck.
This post was edited on 7/3/25 at 9:10 pm
Posted on 7/3/25 at 9:23 pm to YouKnowImRight
If you're confident you won't substitute your contributions for the loan repayment, go for it.
Posted on 7/3/25 at 9:55 pm to YouKnowImRight
What you might be overlooking is the lost growth while 401k balance is lower. Since market tends to go up, you will likely be selling shares at today's price then buying them back at higher prices (fewer shares.)
If market happens to drop you could come out ahead but more often it goes up. If it goes up biggly, you could miss a lot of gains. Essentially, you are trading risk for potential to do better than 7.5% HELOC. HELOC also could adjust up though.
How your 401k is allocated.coukd also help determine way ahead. If you are largely in 'safe' bonds it wouldnt be as risky a.strategy as.if you are.pulling out of stock funds that could rise in price during pay back period.
If market happens to drop you could come out ahead but more often it goes up. If it goes up biggly, you could miss a lot of gains. Essentially, you are trading risk for potential to do better than 7.5% HELOC. HELOC also could adjust up though.
How your 401k is allocated.coukd also help determine way ahead. If you are largely in 'safe' bonds it wouldnt be as risky a.strategy as.if you are.pulling out of stock funds that could rise in price during pay back period.
Posted on 7/4/25 at 12:36 am to thunderbird1100
quote:
401k loans are almsot always a bad idea
Its not a bad idea if you need it to get a house PMI free.
You save on the rate, the PMI, and hopefully repay at a faster rate via those savings.
Posted on 7/4/25 at 2:53 am to Chicken
quote:
it is not...but if you leave your job, you have until the end of that tax year to pay it back...
Not true. It's up to each 401k plan to decide when the loan becomes due if the employee leaves the company (voluntary or involuntary).
My last company, you had 10 years to pay off a 401k loan regardless of employment status. My current company gives you 30 days to pay off a 401k loan if you no longer work for the company.
Posted on 7/4/25 at 11:49 am to gpburdell
We looked at it recently to use as a possible bridge loan to buy a house before we sell ours.
Decided against it to as that house didn't match all our needs.
I will revisit if we find the one that truly ticks all the boxes.
I would be taking put about half what I should make on the sell of mine. Houses here are squeezed and there is demand but only 3 in our same specs so I think we should be able to.move it and pay the 401k back quickly.
Decided against it to as that house didn't match all our needs.
I will revisit if we find the one that truly ticks all the boxes.
I would be taking put about half what I should make on the sell of mine. Houses here are squeezed and there is demand but only 3 in our same specs so I think we should be able to.move it and pay the 401k back quickly.
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