No credit card required
Browse credit cards from a variety of issuers to see if there's a better card for you.
In general taking a loan from your 401k loan is a bad idea. That said I'm on my second one now. With my employer I can still make contributions while I'm paying it back. If that wasn't the case I wouldn't do it. You have to do the research on the pro's and cons to see if it's worth it for you. I've never heard of one appearing on a credit report.
I've borrowed from my 401k on numerous occasions. I'd rather borrow money from myself, and have it paid back through my paycheck. I don't have the discipline to charge money to a card, then pay it back over time by paying minimal payments. I always pay my 401k loans within a year, that way i don't lose too much in compounding interest on my 401k. The way I see it is, I still have another 30+ years before I retire...plenty enough time to contribute.
@MrPickleton wrote:
@foofighter74 wrote:
@kimmiller112 wrote:Don't do it. You end up paying taxes twice on the amount you borrow, when you borrow it and when you take it out when you retire.
You don't pay taxes on money you borrow from 401K. It's a loan, not a withdrawal. And assuming the OP is beyond 59 1/2 when he retires, there won't be additional tax consequences then either.
The real cost of doing a 401K loan is that the money is not in your account growing during the time you're paying it back. And some plans do not allow you to contribute funds when you have an outstanding loan.
But to the OP: you say you can pay it back on 60 months, which tells me you're just getting a general purpose loan. Residential loans can be paid back in as much as 20 years, so you could look into that as well. It would be less money from your check every payday, and with the small amount you are borrowing, you could easily put the lump sum balance back into your 401k when you got your tax refund, or a bonus or something.
You don't pay taxes on the money borrowed persay but you do pay taxes on the amount that you have to pay back in. And then again when you withdraw from it during retirement. A 401k loan is a bad bad idea. The total interest may actually be way more than a standard loan. It may only be 3500 pretax however the amount you have to earn before taxes to pay it back may be 4500 or more. Plus the interest on the loans itself plus the taxes that will get taken out when you retire. It just doesn't make sense to take out a 401k loan for such a small amount.
Thats true with any loan that is repaid. The important considerations are the opportunity costs, i.e., the income that would have been earned within the 401(k), and the net savings in interest expense over other financing options. I would much rather finance $3,500 with a 4% 401(k) loan than with a high interest rate credit card.
@OhioCPA wrote:Thats true with any loan that is repaid. The important considerations are the opportunity costs, i.e., the income that would have been earned within the 401(k), and the net savings in interest expense over other financing options. I would much rather finance $3,500 with a 4% 401(k) loan than with a high interest rate credit card.
However you don't withdraw money from a loan when it is paid off. A 401k you do. So you are paying taxes twice on money. Depending on your tax bracket this may be more 'interest' than a traditonal loan. Plus if you lose your job and you don't have the money right away to pay it back you can get tax penalties for early withdraw.
Following your logic, you saved tax on the money going into the 401(k), so the net is taxed once, not twice as you assert.
@MrPickleton wrote:
@OhioCPA wrote:Thats true with any loan that is repaid. The important considerations are the opportunity costs, i.e., the income that would have been earned within the 401(k), and the net savings in interest expense over other financing options. I would much rather finance $3,500 with a 4% 401(k) loan than with a high interest rate credit card.
However you don't withdraw money from a loan when it is paid off. A 401k you do. So you are paying taxes twice on money. Depending on your tax bracket this may be more 'interest' than a traditonal loan. Plus if you lose your job and you don't have the money right away to pay it back you can get tax penalties for early withdraw.
@FutureBillionaire wrote:
@OhioCPA wrote:A 401(k) loan makes sense if your other sources of financing are at a higher post tax deduction interest rate. For example, a 4% rate on a 401(k) loan beats taking a loan against a credit card at a higher rate. This assumes that the return within the 401(k) during the period of the loan doesn't exceed the 4%.
Ditto. You pay yourself back interest and don't have any additional debt on your credit report. My job takes my payments out of my paycheck. It's a great tool that I use frequently.
I'm sorry, but that is actually funny.
“Beware of little expenses. A small leak will sink a great ship” – Benjamin Franklin
Gardening since 3-26-15
@VirtualCuriosity wrote:
@FutureBillionaire wrote:
@OhioCPA wrote:A 401(k) loan makes sense if your other sources of financing are at a higher post tax deduction interest rate. For example, a 4% rate on a 401(k) loan beats taking a loan against a credit card at a higher rate. This assumes that the return within the 401(k) during the period of the loan doesn't exceed the 4%.
Ditto. You pay yourself back interest and don't have any additional debt on your credit report. My job takes my payments out of my paycheck. It's a great tool that I use frequently.
I'm sorry, but that is actually funny.
VirtualCuriosity, why is the highlighted quoted statement funny? It's actually absolutely accurate. The amount that you pay back in interest and principal on a 401K loan is deposited right back into your account. At Fidelity if I were to take a loan on my 401K I would pay myself back 3.25% interest. Are you saying that is not true?
@OhioCPA wrote:Following your logic, you saved tax on the money going into the 401(k), so the net is taxed once, not twice as you assert.
@MrPickleton wrote:
@OhioCPA wrote:Thats true with any loan that is repaid. The important considerations are the opportunity costs, i.e., the income that would have been earned within the 401(k), and the net savings in interest expense over other financing options. I would much rather finance $3,500 with a 4% 401(k) loan than with a high interest rate credit card.
However you don't withdraw money from a loan when it is paid off. A 401k you do. So you are paying taxes twice on money. Depending on your tax bracket this may be more 'interest' than a traditonal loan. Plus if you lose your job and you don't have the money right away to pay it back you can get tax penalties for early withdraw.
+1. The double taxation fallacy for 401K loans is a difficult myth to kill. The only part that is double taxed is the interest on the loan paid into the 401K.
http://thefinancebuff.com/401k-loan-double-taxation-myth.html
http://www.mymoneyblog.com/double-taxation-and-the-real-reasons-401k-loans-are-bad.html
http://www.mymoneyblog.com/better-example-against-double-taxation-of-401k-loans.html
I like the idea of a 401k loan for buying a house... which is why I did it myself.
Pros:
Cons:
@beenjammin wrote:
@VirtualCuriosity wrote:
@FutureBillionaire wrote:
@OhioCPA wrote:A 401(k) loan makes sense if your other sources of financing are at a higher post tax deduction interest rate. For example, a 4% rate on a 401(k) loan beats taking a loan against a credit card at a higher rate. This assumes that the return within the 401(k) during the period of the loan doesn't exceed the 4%.
Ditto. You pay yourself back interest and don't have any additional debt on your credit report. My job takes my payments out of my paycheck. It's a great tool that I use frequently.
I'm sorry, but that is actually funny.
VirtualCuriosity, why is the highlighted quoted statement funny? It's actually absolutely accurate. The amount that you pay back in interest and principal on a 401K loan is deposited right back into your account. At Fidelity if I were to take a loan on my 401K I would pay myself back 3.25% interest. Are you saying that is not true?
Yeah, I wasn't trying to be mean about it. I was actually thinking about the scenerio in my head in which one would want to take X amount out of a pot that may be collecting 10%-12% interest, and then hindering the beauty of compound interest, just for the chance to pay 3.25% back to themselves. Bottom line is that it's a personal choice I suppose.
“Beware of little expenses. A small leak will sink a great ship” – Benjamin Franklin
Gardening since 3-26-15