Does it make sense to borrow money out of 401K to refinance?

[Coronita]

There might be an interesting angle too if you borrow from your 401k and get laidoff. I don’t know if it triggers any loan repayment acceleration. I would check that out. Also, if you borrow from your 401k, contributions go toward paying off your loan balance and not 401k future contributions.

[JustLurking]

AN is right. This is not a good idea for 2 reasons. You borrow pre-tax money and pay it back with after tax money. That would negate much of her “savings”. And if you lose your job, the full loan amount is due within 60 or 90 days (I would have to look that up to now the exact time frame).

[JustLurking]

AN is right. This is not a good idea for 2 reasons. You borrow pre-tax money and pay it back with after tax money. That would negate much of her “savings”. And if you lose your job, the full loan amount is due within 60 or 90 days (I would have to look that up to now the exact time frame).

[JustLurking]

AN is right. This is not a good idea for 2 reasons. You borrow pre-tax money and pay it back with after tax money. That would negate much of her “savings”. And if you lose your job, the full loan amount is due within 60 or 90 days (I would have to look that up to now the exact time frame).

[JustLurking]

AN is right. This is not a good idea for 2 reasons. You borrow pre-tax money and pay it back with after tax money. That would negate much of her “savings”. And if you lose your job, the full loan amount is due within 60 or 90 days (I would have to look that up to now the exact time frame).

[JustLurking]

AN is right. This is not a good idea for 2 reasons. You borrow pre-tax money and pay it back with after tax money. That would negate much of her “savings”. And if you lose your job, the full loan amount is due within 60 or 90 days (I would have to look that up to now the exact time frame).

[Anonymous]

Her 401k has already taken a drubbing. Taking the money out now will realize all those losses which right now are only on paper. Should the market rebound in the coming years she will be kicking herself.

[Anonymous]

Her 401k has already taken a drubbing. Taking the money out now will realize all those losses which right now are only on paper. Should the market rebound in the coming years she will be kicking herself.

[Anonymous]

Her 401k has already taken a drubbing. Taking the money out now will realize all those losses which right now are only on paper. Should the market rebound in the coming years she will be kicking herself.

[Anonymous]

Her 401k has already taken a drubbing. Taking the money out now will realize all those losses which right now are only on paper. Should the market rebound in the coming years she will be kicking herself.

[Anonymous]

Her 401k has already taken a drubbing. Taking the money out now will realize all those losses which right now are only on paper. Should the market rebound in the coming years she will be kicking herself.

[(former)FormerSanDiegan]

I could be wrong, but I think the $ you borrow will be taxed twice. You’re paying back with after tax $. When you withdraw later, it’ll be taxed again.

Although I agree that borrowing from a 401k when it is down is not a great idea unless the payoff is good (which it might be in this case). You can forget that double taxation issue as it is a red herring (see below**). The only important conisderation is whether the loan is a good investment from your 401k’s point of view in terms of return and whether taking the loan will reduce the overall rate you are paying on debt service.

** This “double taxation” issue is overepmhasized by many, including financial advisors and diverts attention from the important points to consider (above).
Here’s why :

Suppose you don’t borrow from the 401k. Those dollars that you were going to pay the loan back with are taxed anyway.

Example to illustrate:

Case 1 – You borrow $10,000 from your 401k at 6% and pay back the loan with after tax dollars about $200 per month (This $200 is taxed). If your 401k made less than 6% on other investments your 401k came out ahead by making the loan. If you used the $10,000 proceeds to pay off a debt at a higher interest rate you come out ahead (or if you use it to improve your overall effective interest rate on your debt).

Case 2 – You don’t borrow from your 401k. The $200 you are not paying against the loan is taxed anyway.

SO, whether you take the loan from the 401k or not, the dollars you have to either allocate to paying that loan or other things is taxed regardless.

Although, the dollars literally placed in the 401k when taking a 401k loan are taxed twice. It does not result in overall increased tax paid by the individual.

[(former)FormerSanDiegan]

I could be wrong, but I think the $ you borrow will be taxed twice. You’re paying back with after tax $. When you withdraw later, it’ll be taxed again.

Although I agree that borrowing from a 401k when it is down is not a great idea unless the payoff is good (which it might be in this case). You can forget that double taxation issue as it is a red herring (see below**). The only important conisderation is whether the loan is a good investment from your 401k’s point of view in terms of return and whether taking the loan will reduce the overall rate you are paying on debt service.

** This “double taxation” issue is overepmhasized by many, including financial advisors and diverts attention from the important points to consider (above).
Here’s why :

Suppose you don’t borrow from the 401k. Those dollars that you were going to pay the loan back with are taxed anyway.

Example to illustrate:

Case 1 – You borrow $10,000 from your 401k at 6% and pay back the loan with after tax dollars about $200 per month (This $200 is taxed). If your 401k made less than 6% on other investments your 401k came out ahead by making the loan. If you used the $10,000 proceeds to pay off a debt at a higher interest rate you come out ahead (or if you use it to improve your overall effective interest rate on your debt).

Case 2 – You don’t borrow from your 401k. The $200 you are not paying against the loan is taxed anyway.

SO, whether you take the loan from the 401k or not, the dollars you have to either allocate to paying that loan or other things is taxed regardless.

Although, the dollars literally placed in the 401k when taking a 401k loan are taxed twice. It does not result in overall increased tax paid by the individual.

[(former)FormerSanDiegan]

I could be wrong, but I think the $ you borrow will be taxed twice. You’re paying back with after tax $. When you withdraw later, it’ll be taxed again.

Although I agree that borrowing from a 401k when it is down is not a great idea unless the payoff is good (which it might be in this case). You can forget that double taxation issue as it is a red herring (see below**). The only important conisderation is whether the loan is a good investment from your 401k’s point of view in terms of return and whether taking the loan will reduce the overall rate you are paying on debt service.

** This “double taxation” issue is overepmhasized by many, including financial advisors and diverts attention from the important points to consider (above).
Here’s why :

Suppose you don’t borrow from the 401k. Those dollars that you were going to pay the loan back with are taxed anyway.

Example to illustrate:

Case 1 – You borrow $10,000 from your 401k at 6% and pay back the loan with after tax dollars about $200 per month (This $200 is taxed). If your 401k made less than 6% on other investments your 401k came out ahead by making the loan. If you used the $10,000 proceeds to pay off a debt at a higher interest rate you come out ahead (or if you use it to improve your overall effective interest rate on your debt).

Case 2 – You don’t borrow from your 401k. The $200 you are not paying against the loan is taxed anyway.

SO, whether you take the loan from the 401k or not, the dollars you have to either allocate to paying that loan or other things is taxed regardless.

Although, the dollars literally placed in the 401k when taking a 401k loan are taxed twice. It does not result in overall increased tax paid by the individual.

[(former)FormerSanDiegan]

I could be wrong, but I think the $ you borrow will be taxed twice. You’re paying back with after tax $. When you withdraw later, it’ll be taxed again.

Although I agree that borrowing from a 401k when it is down is not a great idea unless the payoff is good (which it might be in this case). You can forget that double taxation issue as it is a red herring (see below**). The only important conisderation is whether the loan is a good investment from your 401k’s point of view in terms of return and whether taking the loan will reduce the overall rate you are paying on debt service.

** This “double taxation” issue is overepmhasized by many, including financial advisors and diverts attention from the important points to consider (above).
Here’s why :

Suppose you don’t borrow from the 401k. Those dollars that you were going to pay the loan back with are taxed anyway.

Example to illustrate:

Case 1 – You borrow $10,000 from your 401k at 6% and pay back the loan with after tax dollars about $200 per month (This $200 is taxed). If your 401k made less than 6% on other investments your 401k came out ahead by making the loan. If you used the $10,000 proceeds to pay off a debt at a higher interest rate you come out ahead (or if you use it to improve your overall effective interest rate on your debt).

Case 2 – You don’t borrow from your 401k. The $200 you are not paying against the loan is taxed anyway.

SO, whether you take the loan from the 401k or not, the dollars you have to either allocate to paying that loan or other things is taxed regardless.

Although, the dollars literally placed in the 401k when taking a 401k loan are taxed twice. It does not result in overall increased tax paid by the individual.

[Author]

Posts