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

[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.

[NicMM]

[quote=FormerSanDiegan]Thanks joestool for also pointing out this red herring.
[/quote]

I was doubting about the double-taxing. Thanks joestool for pointing it out.

[NicMM]

[quote=FormerSanDiegan]Thanks joestool for also pointing out this red herring.
[/quote]

I was doubting about the double-taxing. Thanks joestool for pointing it out.

[NicMM]

[quote=FormerSanDiegan]Thanks joestool for also pointing out this red herring.
[/quote]

I was doubting about the double-taxing. Thanks joestool for pointing it out.

[NicMM]

[quote=FormerSanDiegan]Thanks joestool for also pointing out this red herring.
[/quote]

I was doubting about the double-taxing. Thanks joestool for pointing it out.

[NicMM]

[quote=FormerSanDiegan]Thanks joestool for also pointing out this red herring.
[/quote]

I was doubting about the double-taxing. Thanks joestool for pointing it out.

[an]

[quote=joestool]
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.

[/quote]
I stand corrected. The double tax issue is minimal, although it’s there. However, my other point still stands. Make your job is secure or you have cash to pay it back right away after a job loss and still have enough cash to survive until you get another job. I would think a cheaper source of fund would be balance transfer from new credit cards. They’re 0% right now for 1 year. You can roll from one 0% card to another until you pay it all back.

[an]

[quote=joestool]
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.

[/quote]
I stand corrected. The double tax issue is minimal, although it’s there. However, my other point still stands. Make your job is secure or you have cash to pay it back right away after a job loss and still have enough cash to survive until you get another job. I would think a cheaper source of fund would be balance transfer from new credit cards. They’re 0% right now for 1 year. You can roll from one 0% card to another until you pay it all back.

[an]

[quote=joestool]
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.

[/quote]
I stand corrected. The double tax issue is minimal, although it’s there. However, my other point still stands. Make your job is secure or you have cash to pay it back right away after a job loss and still have enough cash to survive until you get another job. I would think a cheaper source of fund would be balance transfer from new credit cards. They’re 0% right now for 1 year. You can roll from one 0% card to another until you pay it all back.

[an]

[quote=joestool]
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.

[/quote]
I stand corrected. The double tax issue is minimal, although it’s there. However, my other point still stands. Make your job is secure or you have cash to pay it back right away after a job loss and still have enough cash to survive until you get another job. I would think a cheaper source of fund would be balance transfer from new credit cards. They’re 0% right now for 1 year. You can roll from one 0% card to another until you pay it all back.

[an]

[quote=joestool]
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.

[/quote]
I stand corrected. The double tax issue is minimal, although it’s there. However, my other point still stands. Make your job is secure or you have cash to pay it back right away after a job loss and still have enough cash to survive until you get another job. I would think a cheaper source of fund would be balance transfer from new credit cards. They’re 0% right now for 1 year. You can roll from one 0% card to another until you pay it all back.

[NicMM]

I don’t agree with using credit cards as the source of fund. Because,
1. It’s hard to get $40K in one or two 0% credit cards.
2. Such big balance would drag down your credit score and therefore negatively influence the mortgage rate you can get.
3. You have to find the next available 0 cards in a year again and again.

If she loses her job in 5 years (before pays back the 401K loan), she can chose to take the rest of the loan out as an early distribution and pay income tax of that portion. Without a job, I guess her tax brake would be lower than now.

[NicMM]

I don’t agree with using credit cards as the source of fund. Because,
1. It’s hard to get $40K in one or two 0% credit cards.
2. Such big balance would drag down your credit score and therefore negatively influence the mortgage rate you can get.
3. You have to find the next available 0 cards in a year again and again.

If she loses her job in 5 years (before pays back the 401K loan), she can chose to take the rest of the loan out as an early distribution and pay income tax of that portion. Without a job, I guess her tax brake would be lower than now.

[NicMM]

I don’t agree with using credit cards as the source of fund. Because,
1. It’s hard to get $40K in one or two 0% credit cards.
2. Such big balance would drag down your credit score and therefore negatively influence the mortgage rate you can get.
3. You have to find the next available 0 cards in a year again and again.

If she loses her job in 5 years (before pays back the 401K loan), she can chose to take the rest of the loan out as an early distribution and pay income tax of that portion. Without a job, I guess her tax brake would be lower than now.

[NicMM]

I don’t agree with using credit cards as the source of fund. Because,
1. It’s hard to get $40K in one or two 0% credit cards.
2. Such big balance would drag down your credit score and therefore negatively influence the mortgage rate you can get.
3. You have to find the next available 0 cards in a year again and again.

If she loses her job in 5 years (before pays back the 401K loan), she can chose to take the rest of the loan out as an early distribution and pay income tax of that portion. Without a job, I guess her tax brake would be lower than now.

[Author]

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