Borrowing Against a 401k

[HLS]

VIZ,
You understand the concept well…
a 401K loan is also a possible way to avoid mortgage insurance, with the savings representing a guaranteed return.

1) Find out if you can repay the loan at any time in a lump sum if you want to

2) Your CD interest will be taxable, possibly making your net return not much more than your 401K sheltered return. One way to avoid this is with a tax sheltered acct if possible.

3) The major downside to a 401K loan is that if you lose or leave the job, you may have to repay it in full within 30/60 days otherwise it is taxed as income plus a penalty (10%+)

Check with YOUR plan administrator for their rules and ask lots of questions before taking the loan.

[mwtosd]

I am not sure the feelings of the group on Suze Orman, but I do listen/watch her show and periodic interviews. She has always said

“Never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don’t pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time. And that isn’t even considering the penalties you have to pay if you change jobs/quit/lose your job, in which case the money is due immediately and subject to taxes and a 10% penalty.”

[mwtosd]

I am not sure the feelings of the group on Suze Orman, but I do listen/watch her show and periodic interviews. She has always said

“Never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don’t pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time. And that isn’t even considering the penalties you have to pay if you change jobs/quit/lose your job, in which case the money is due immediately and subject to taxes and a 10% penalty.”

[mwtosd]

I am not sure the feelings of the group on Suze Orman, but I do listen/watch her show and periodic interviews. She has always said

“Never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don’t pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time. And that isn’t even considering the penalties you have to pay if you change jobs/quit/lose your job, in which case the money is due immediately and subject to taxes and a 10% penalty.”

[mwtosd]

I am not sure the feelings of the group on Suze Orman, but I do listen/watch her show and periodic interviews. She has always said

“Never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don’t pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time. And that isn’t even considering the penalties you have to pay if you change jobs/quit/lose your job, in which case the money is due immediately and subject to taxes and a 10% penalty.”

[mwtosd]

I am not sure the feelings of the group on Suze Orman, but I do listen/watch her show and periodic interviews. She has always said

“Never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don’t pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time. And that isn’t even considering the penalties you have to pay if you change jobs/quit/lose your job, in which case the money is due immediately and subject to taxes and a 10% penalty.”

[RB132]

Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the panelty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.

[RB132]

Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the panelty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.

[RB132]

Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the panelty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.

[RB132]

Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the panelty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.

[RB132]

Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the panelty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.

[(former)FormerSanDiegan]

[quote=RB132]Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the pnalty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.[/quote]

The fact that you pay it back with after-tax money is a red-herring. As is the Suze Orman “that money is taxed twice” advice.

If you borrow from another source outside your 401K you are taxed on what you pay back to that loan, too.

Consider the loan from the perspective of your 401k and from the perspective of you as an individual.

First, the 401k – From the 401k’s point of view, the loan is simply a short/intermediate bond that pays back at a rate of 3% or whatever the loan rate is. If you are happy with what amounts to a fixed income CD-like investment that pays about 3% or so for a portion of your 401 it might make sense. For most people, if they had taken a loan a year ago and put it in the mattress and paid it back today, their 401k would be ahead.

Second, from your point of view – If borrowing from your 401k at 3% and paying down a debt that is much higher (e.g. a 7% second) it can make sense. Also, as suggested above there is sometimes a non-linear improvement in loan terms in cases where you can use the 401k loan to eliminate PMI. In that case the equivalent return can be in the double digits.

Still, should you leave or lose your job, the early withdrawal penalty would be the major concern. The other concern would be that you would miss out on investment opportunities in the market, should it rally during the term of the loan.

[(former)FormerSanDiegan]

[quote=RB132]Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the pnalty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.[/quote]

The fact that you pay it back with after-tax money is a red-herring. As is the Suze Orman “that money is taxed twice” advice.

If you borrow from another source outside your 401K you are taxed on what you pay back to that loan, too.

Consider the loan from the perspective of your 401k and from the perspective of you as an individual.

First, the 401k – From the 401k’s point of view, the loan is simply a short/intermediate bond that pays back at a rate of 3% or whatever the loan rate is. If you are happy with what amounts to a fixed income CD-like investment that pays about 3% or so for a portion of your 401 it might make sense. For most people, if they had taken a loan a year ago and put it in the mattress and paid it back today, their 401k would be ahead.

Second, from your point of view – If borrowing from your 401k at 3% and paying down a debt that is much higher (e.g. a 7% second) it can make sense. Also, as suggested above there is sometimes a non-linear improvement in loan terms in cases where you can use the 401k loan to eliminate PMI. In that case the equivalent return can be in the double digits.

Still, should you leave or lose your job, the early withdrawal penalty would be the major concern. The other concern would be that you would miss out on investment opportunities in the market, should it rally during the term of the loan.

[(former)FormerSanDiegan]

[quote=RB132]Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the pnalty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.[/quote]

The fact that you pay it back with after-tax money is a red-herring. As is the Suze Orman “that money is taxed twice” advice.

If you borrow from another source outside your 401K you are taxed on what you pay back to that loan, too.

Consider the loan from the perspective of your 401k and from the perspective of you as an individual.

First, the 401k – From the 401k’s point of view, the loan is simply a short/intermediate bond that pays back at a rate of 3% or whatever the loan rate is. If you are happy with what amounts to a fixed income CD-like investment that pays about 3% or so for a portion of your 401 it might make sense. For most people, if they had taken a loan a year ago and put it in the mattress and paid it back today, their 401k would be ahead.

Second, from your point of view – If borrowing from your 401k at 3% and paying down a debt that is much higher (e.g. a 7% second) it can make sense. Also, as suggested above there is sometimes a non-linear improvement in loan terms in cases where you can use the 401k loan to eliminate PMI. In that case the equivalent return can be in the double digits.

Still, should you leave or lose your job, the early withdrawal penalty would be the major concern. The other concern would be that you would miss out on investment opportunities in the market, should it rally during the term of the loan.

[(former)FormerSanDiegan]

[quote=RB132]Here is the problems I can see with borroing from 401k.

1, You may to pay back if you leave the job or lost the job. If you don’t pay, the pnalty comes.

2, You pay the interest with your after tax money. When you take it out after retire, you pay tax again.[/quote]

The fact that you pay it back with after-tax money is a red-herring. As is the Suze Orman “that money is taxed twice” advice.

If you borrow from another source outside your 401K you are taxed on what you pay back to that loan, too.

Consider the loan from the perspective of your 401k and from the perspective of you as an individual.

First, the 401k – From the 401k’s point of view, the loan is simply a short/intermediate bond that pays back at a rate of 3% or whatever the loan rate is. If you are happy with what amounts to a fixed income CD-like investment that pays about 3% or so for a portion of your 401 it might make sense. For most people, if they had taken a loan a year ago and put it in the mattress and paid it back today, their 401k would be ahead.

Second, from your point of view – If borrowing from your 401k at 3% and paying down a debt that is much higher (e.g. a 7% second) it can make sense. Also, as suggested above there is sometimes a non-linear improvement in loan terms in cases where you can use the 401k loan to eliminate PMI. In that case the equivalent return can be in the double digits.

Still, should you leave or lose your job, the early withdrawal penalty would be the major concern. The other concern would be that you would miss out on investment opportunities in the market, should it rally during the term of the loan.

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