topic Re: 401K loans in Personal Finance

401K loans

Anonymous — Mon, 11 Mar 2013 23:39:19 GMT

Got approved for a home loan today and now all we gotta do is find a house..LOL But we was thinking of borrowing some money from my wifes 401k plan.We was gonna borrow $3500,they said we could finance it up to 60 months at 4% intrest.We would be useing the money for home inspection, appraisal and possibly the survery.Is it a good idea to borrow from your 401K? Will this show up on your credit report?

Re: 401K loans

AndySoCal — Tue, 12 Mar 2013 01:37:03 GMT

No it will not show on your credit report. You are the lender and the borrower in this case. Keep in mind there are tax consequences if you leave and do not fund the balance. Check with the plan administrator for details on possible tax consequences.

Re: 401K loans

kimmiller112 — Tue, 12 Mar 2013 05:02:54 GMT

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.

Re: 401K loans

VirtualCuriosity — Tue, 12 Mar 2013 07:18:07 GMT

I would agree with not borrowing from the 401k plan. No pros, only cons. Some will say that the only time you might want to borrow is to avoid a home forclosure, so long as it permanently avoids it.

Re: 401K loans

Anonymous — Tue, 12 Mar 2013 08:55:46 GMT

@Anonymous wrote:
Got approved for a home loan today and now all we gotta do is find a house..LOL But we was thinking of borrowing some money from my wifes 401k plan.We was gonna borrow $3500,they said we could finance it up to 60 months at 4% intrest.We would be useing the money for home inspection, appraisal and possibly the survery.Is it a good idea to borrow from your 401K? Will this show up on your credit report?

If it is just $3500, why not add it to your mortage, or get a personal loan? You can even finance it on your credit card.

You're getting hit by double taxation whenever you borrow from 401k. The financing cost itself is wayyyyyy more than whatever interest rate your credit card company hits you with.

Re: 401K loans

OhioCPA — Tue, 12 Mar 2013 11:57:28 GMT

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%.

Re: 401K loans

FutureBillionaire — Tue, 12 Mar 2013 20:09:32 GMT

@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.

Re: 401K loans

Anonymous — Tue, 12 Mar 2013 20:14:28 GMT

@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.

Re: 401K loans

Anonymous — Wed, 13 Mar 2013 04:01:56 GMT

@Anonymous 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.

Re: 401K loans

Anonymous — Wed, 13 Mar 2013 14:32:41 GMT

In general, I'd say they are a bad idea. But not when you have such a small loan amount, and you can build equity in a house. A lot of people are buying homes lately, and as soon as they close, they have a ton of equity built up as they bought the home much cheaper than it's appraised for. Definitely worth it to do that.

Also, as I said, with a loan that small...you only need to put back the lump sum balance to get rid of the loan...you don't need to pay it over 60 months. So again, you wouldn't necessarily need to pay all that interest.

OP would be ahead by a lot if they secured the home with the help of the loan, especially if it's paid back in a timely fashion. No question.

Re: 401K loans

boomhower — Thu, 14 Mar 2013 00:37:05 GMT

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.

Re: 401K loans

ccubedzx3 — Thu, 14 Mar 2013 11:08:15 GMT

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.

Re: 401K loans

OhioCPA — Thu, 14 Mar 2013 12:07:26 GMT

@Anonymous wrote:
@Anonymous 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.

Re: 401K loans

Anonymous — Thu, 14 Mar 2013 18:45:40 GMT

@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.

Re: 401K loans

OhioCPA — Fri, 15 Mar 2013 01:19:43 GMT

@Anonymous 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.

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.

Re: 401K loans

VirtualCuriosity — Mon, 18 Mar 2013 13:04:04 GMT

@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.

Re: 401K loans

beenjammin — Tue, 26 Mar 2013 02:14:13 GMT

@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?

Re: 401K loans

Walt_K — Wed, 27 Mar 2013 01:34:06 GMT

@OhioCPA wrote:
@Anonymous 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.
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.

+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

Re: 401K loans

webhopper — Fri, 29 Mar 2013 15:16:21 GMT

I like the idea of a 401k loan for buying a house... which is why I did it myself.

Pros:

You borrow your own money and pay interest to yourself
The loan payment does not count against your DTI for the house since it is secured by your own financial assets
Does not report on your credit report
Is a good way to get gauranteed returns on the money invested in your 401k
You can get a house faster using your own resources, and take advantage of the current decline in housing costs... After a full economic recovery, you will be able to buy less house for the same amount of money that you can now.
Real estate is a great hedge against future inflation.
It makes your family more stable, and causes your kids to do better in school and later in life because they feel more secure about their circumstances and they build self esteem.

Cons:

You pay back this loan with "after tax" income... to me this is no big deal because you also have to pay back car loans and credit card bills and home loans with "after tax" money... no difference in my opinion
If you leave your job and do not repay the loan, you will be taxed on the unpaid balance of the loan.
Since your 401k loan money is not invested in a mutual fund, you may miss out on the growth that you could see if it were in a mutual fund... For example, if you borrow 3k, and then the stock prices rise by 12%, you miss out on the opportunity to grow your account by 12%, and instead you grow your account by only 4% (interest rate of loan). Opportunity Cost lost.
It is a debt that will have to be paid back, and the payment effectively lowers your disposable income during the repayment period.

Re: 401K loans

VirtualCuriosity — Sat, 30 Mar 2013 23:55:08 GMT

@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.