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

[(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.

[joestool]

[quote=carlsbadworker][quote=asianautica]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. So, unless I’m wrong or you’re in the 0% tax bracket, it doesn’t make sense to borrow from your 401k to refi. Also, if you quit or get fired, you need to pay that money back immediately. The $ in your 401k is protected from bankruptcy. They can’t go after that $. However, they can go after your house if you filed for bankruptcy.[/quote]

I think that’s absolutely correct. One extra angle of consideration is that you don’t want to put all your eggs in a single basket. So unless you have a huge 401K saving, you don’t want to take it out and put it into a house altogether. After all, house is a depreciating asset right now and stock market could turn around at any time.[/quote]

WRONG WRONG WRONG. Let’s debunk this Suze Orman crap:
Yes, you are paying taxed money into your 401lk that will be taxed again upon distribution. But you just took out a loan of the same amount of untaxed money that’s now in your hand!

NET result is you are not paying any double taxes on the money borrowed from your 401k.

The only money that is double taxed is the extra amount of post tax money you are additionally paying back as interest to yourself. That extra amount of interest is paid back into your 401k to compound tax free until distribution.

You end up paying only a proportionally small amount extra in taxes but this is offset by the cash in hand provided immediately from the loan and at the end of payback, you will end up with more total contributed into your 401k.

Pretty cheap source of funds in all. Just make sure if you take a 401k loan, you can pay it back into the 401k or you will be taxed with penalties for early distribution.

[joestool]

[quote=carlsbadworker][quote=asianautica]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. So, unless I’m wrong or you’re in the 0% tax bracket, it doesn’t make sense to borrow from your 401k to refi. Also, if you quit or get fired, you need to pay that money back immediately. The $ in your 401k is protected from bankruptcy. They can’t go after that $. However, they can go after your house if you filed for bankruptcy.[/quote]

I think that’s absolutely correct. One extra angle of consideration is that you don’t want to put all your eggs in a single basket. So unless you have a huge 401K saving, you don’t want to take it out and put it into a house altogether. After all, house is a depreciating asset right now and stock market could turn around at any time.[/quote]

WRONG WRONG WRONG. Let’s debunk this Suze Orman crap:
Yes, you are paying taxed money into your 401lk that will be taxed again upon distribution. But you just took out a loan of the same amount of untaxed money that’s now in your hand!

NET result is you are not paying any double taxes on the money borrowed from your 401k.

The only money that is double taxed is the extra amount of post tax money you are additionally paying back as interest to yourself. That extra amount of interest is paid back into your 401k to compound tax free until distribution.

You end up paying only a proportionally small amount extra in taxes but this is offset by the cash in hand provided immediately from the loan and at the end of payback, you will end up with more total contributed into your 401k.

Pretty cheap source of funds in all. Just make sure if you take a 401k loan, you can pay it back into the 401k or you will be taxed with penalties for early distribution.

[joestool]

[quote=carlsbadworker][quote=asianautica]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. So, unless I’m wrong or you’re in the 0% tax bracket, it doesn’t make sense to borrow from your 401k to refi. Also, if you quit or get fired, you need to pay that money back immediately. The $ in your 401k is protected from bankruptcy. They can’t go after that $. However, they can go after your house if you filed for bankruptcy.[/quote]

I think that’s absolutely correct. One extra angle of consideration is that you don’t want to put all your eggs in a single basket. So unless you have a huge 401K saving, you don’t want to take it out and put it into a house altogether. After all, house is a depreciating asset right now and stock market could turn around at any time.[/quote]

WRONG WRONG WRONG. Let’s debunk this Suze Orman crap:
Yes, you are paying taxed money into your 401lk that will be taxed again upon distribution. But you just took out a loan of the same amount of untaxed money that’s now in your hand!

NET result is you are not paying any double taxes on the money borrowed from your 401k.

The only money that is double taxed is the extra amount of post tax money you are additionally paying back as interest to yourself. That extra amount of interest is paid back into your 401k to compound tax free until distribution.

You end up paying only a proportionally small amount extra in taxes but this is offset by the cash in hand provided immediately from the loan and at the end of payback, you will end up with more total contributed into your 401k.

Pretty cheap source of funds in all. Just make sure if you take a 401k loan, you can pay it back into the 401k or you will be taxed with penalties for early distribution.

[joestool]

[quote=carlsbadworker][quote=asianautica]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. So, unless I’m wrong or you’re in the 0% tax bracket, it doesn’t make sense to borrow from your 401k to refi. Also, if you quit or get fired, you need to pay that money back immediately. The $ in your 401k is protected from bankruptcy. They can’t go after that $. However, they can go after your house if you filed for bankruptcy.[/quote]

I think that’s absolutely correct. One extra angle of consideration is that you don’t want to put all your eggs in a single basket. So unless you have a huge 401K saving, you don’t want to take it out and put it into a house altogether. After all, house is a depreciating asset right now and stock market could turn around at any time.[/quote]

WRONG WRONG WRONG. Let’s debunk this Suze Orman crap:
Yes, you are paying taxed money into your 401lk that will be taxed again upon distribution. But you just took out a loan of the same amount of untaxed money that’s now in your hand!

NET result is you are not paying any double taxes on the money borrowed from your 401k.

The only money that is double taxed is the extra amount of post tax money you are additionally paying back as interest to yourself. That extra amount of interest is paid back into your 401k to compound tax free until distribution.

You end up paying only a proportionally small amount extra in taxes but this is offset by the cash in hand provided immediately from the loan and at the end of payback, you will end up with more total contributed into your 401k.

Pretty cheap source of funds in all. Just make sure if you take a 401k loan, you can pay it back into the 401k or you will be taxed with penalties for early distribution.

[joestool]

[quote=carlsbadworker][quote=asianautica]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. So, unless I’m wrong or you’re in the 0% tax bracket, it doesn’t make sense to borrow from your 401k to refi. Also, if you quit or get fired, you need to pay that money back immediately. The $ in your 401k is protected from bankruptcy. They can’t go after that $. However, they can go after your house if you filed for bankruptcy.[/quote]

I think that’s absolutely correct. One extra angle of consideration is that you don’t want to put all your eggs in a single basket. So unless you have a huge 401K saving, you don’t want to take it out and put it into a house altogether. After all, house is a depreciating asset right now and stock market could turn around at any time.[/quote]

WRONG WRONG WRONG. Let’s debunk this Suze Orman crap:
Yes, you are paying taxed money into your 401lk that will be taxed again upon distribution. But you just took out a loan of the same amount of untaxed money that’s now in your hand!

NET result is you are not paying any double taxes on the money borrowed from your 401k.

The only money that is double taxed is the extra amount of post tax money you are additionally paying back as interest to yourself. That extra amount of interest is paid back into your 401k to compound tax free until distribution.

You end up paying only a proportionally small amount extra in taxes but this is offset by the cash in hand provided immediately from the loan and at the end of payback, you will end up with more total contributed into your 401k.

Pretty cheap source of funds in all. Just make sure if you take a 401k loan, you can pay it back into the 401k or you will be taxed with penalties for early distribution.

[(former)FormerSanDiegan]

Thanks joestool for also pointing out this red herring.

[(former)FormerSanDiegan]

Thanks joestool for also pointing out this red herring.

[(former)FormerSanDiegan]

Thanks joestool for also pointing out this red herring.

[(former)FormerSanDiegan]

Thanks joestool for also pointing out this red herring.

[(former)FormerSanDiegan]

Thanks joestool for also pointing out this red herring.

[NotCranky]

To my thinking the house is a done deal so unless she is going to dump it or lose it,whether or not it is depreciating doesn’t factor. If her 401k takes off …well that’s a consideration. I think the refinancing is the “bird in the hand”. This is an interesting problem , without authority, it looks plausible to me, if keeping the house for the long haul, or even beyond the break even point is practically fool proof. I guess that would include addressing potential cash flow/liquidity problems.

[NotCranky]

To my thinking the house is a done deal so unless she is going to dump it or lose it,whether or not it is depreciating doesn’t factor. If her 401k takes off …well that’s a consideration. I think the refinancing is the “bird in the hand”. This is an interesting problem , without authority, it looks plausible to me, if keeping the house for the long haul, or even beyond the break even point is practically fool proof. I guess that would include addressing potential cash flow/liquidity problems.

[NotCranky]

To my thinking the house is a done deal so unless she is going to dump it or lose it,whether or not it is depreciating doesn’t factor. If her 401k takes off …well that’s a consideration. I think the refinancing is the “bird in the hand”. This is an interesting problem , without authority, it looks plausible to me, if keeping the house for the long haul, or even beyond the break even point is practically fool proof. I guess that would include addressing potential cash flow/liquidity problems.

[NotCranky]

To my thinking the house is a done deal so unless she is going to dump it or lose it,whether or not it is depreciating doesn’t factor. If her 401k takes off …well that’s a consideration. I think the refinancing is the “bird in the hand”. This is an interesting problem , without authority, it looks plausible to me, if keeping the house for the long haul, or even beyond the break even point is practically fool proof. I guess that would include addressing potential cash flow/liquidity problems.

[Author]

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