401k Loans

Nope you're going to pay tax on the withdrawal, plus loan origination fees, plus interest. So you'll withdraw $60-65K to get the $50K, and you still have to pay back $60-65K with interest. This is 50 kinds of dumb, imo.

If you must borrow money, bank loan or HELOC is the way to go. Worst case scenario, if you for some reason default on the loan, you ruin your credit, and if you have no way to pay it back, you can usually settle and possibly file bankruptcy.


But if you default on a 401K loan, you have IRS problems to deal with on top of the debt you assumed by borrowing your own money. AND THEN YOU WILL BE IN A WORLD OF shite.

DON'T DO A 401K LOAN.

I don't see a problem with 401k loans. I have taken out both a 401k loan and a HELOC for what have turned out to be very successful investments, but personally I would never take out a loan against a house or portfolio for consumables (just for investments).

If you are taking out a loan for cash-generating investments, most of the parroted conventional wisdom doesn't apply. Of the ones listed in Vol's article, only #6 (losing the cushion of being able to take out a 401k loan) was really worth considering.

The concept of defaulting on a 401k loan doesn't make sense to me. My 401k loan payments were pulled directly out of each paycheck, so it wasn't a choice to pay or to pay on time. If you lose your job, your typically have to pay back the loan within a short time frame or become liable for income tax plus a 10% penalty on the amount still owed (not a default).

Before making the decision, I worked the incremental cash flows pretty hard versus alternative options. This involves breaking out the loan into its two distinct components - the 401k investment vehicle yielding x% interest, and the loan which you will owe at certain payment terms. Anyone who has not evaluated this in detail will always mention that you are "paying back the loan with post-tax money", and it is really not worth arguing because they are not going to listen or be able to process it.

To me the biggest drawback to the 401k was the big liquidity hit. My plan only allowed one 401k loan at a time with a max of $50k. Upon taking out the loan (which had a $50 origination fee), the principal plus interest payments immediately started being deducted from each paycheck. Whereas with the HELOC, I only had to pay a small interest amount each month on the outstanding balance. So scaling in the total investment (with net cash flow increasing also over the investment phase), it made more sense to scale up with the HELOC, cover with the 401k loan, then scale up the remaining investment with the HELOC. This was the optimum in terms of having the cash flow from the investment covering the HELOC/401k payments due each month.

The investment has almost completely paid out the borrowed funds out of its cash flow alone, so it made tremendous sense for me to put the 401k funds to work outside of the mutual fund options I had within the account.