topic Re: BOA Loan vs. 401K Loan in General Credit Topics

BOA Loan vs. 401K Loan

Anonymous — Sun, 29 Jun 2008 19:00:01 GMT

Ok, here is my situation - any thoughts would be appreciated.

My DH had a BOA Credit Card that we used a balance transfer offer to consolidate some debt to a while ago. At some point, they jacked the rate through the roof. When I called them, there wasn't any specific reason that they could give me - just that the terms of the balance transfer were up and that was the new APR on the account. (I don't recall exactly what it was - 26% or something crazy like that.)

They wouldn't reduce the APR on that account, but they did offer to open a Gold Option loan in my name that could be used to pay off the CC in his. Not a great interest rate, 22%, but better than what we had - so we did it.

Now, I am trying to find a solution to get rid of the 22% rate. I've called - they won't adjust.

I can take a loan against my 401K at 6%, and do payroll deduction to pay off this line completely. I know that most don't think this is a good idea, however, it is killing me to be paying 22% on this. If the interest on the BOA line was lower, I wouldn't even consider it, understanding that I will be paying post tax dollars back into my account and will lose the opportunity to earn returns on the money - but the amount of interest I'll save on the line I think outweighs in this case.

I am 34, and my FICO score with all three agencies is 724. I think getting this $20K BOA line off my credit report will improve my score. In addition, the payment I will make to my employer each month will be less than the payment I am making to BOA right now, so I can use the additional cash to pay extra on our other CC or our HELOC.

Re: BOA Loan vs. 401K Loan

fishbjc — Sun, 29 Jun 2008 21:27:49 GMT

I did a 401k loan to pay off debt a few years ago. If it gives you *peace of mind*, then why not? Before you do though, have you tried to join NFCU? Their rates are pretty decent!

I think getting a good nights sleep is important. When you have debt looming over your head, the best thing to do is pay if off quickly using the method that gives you satisfaction.

Re: BOA Loan vs. 401K Loan

Anonymous — Sun, 29 Jun 2008 21:37:04 GMT

Having a 401K or other savings are good....IMO I would do just about anything to get rid of that % rate!

I would also make extra payments to get the 401K loan off ASAP!! By making double payments on it...you will still be able to make extra payments on other loans.

Be very sure before doing anything about this though!

Re: BOA Loan vs. 401K Loan

marty56 — Mon, 30 Jun 2008 01:49:45 GMT

IMHO I would not take 401k loan out to reduce the interest. Dave Ramsey and others say it is never a good idea to take retirement or HELOC money to pay unsecured debt.

If you do this you need to take a hard look at how you are managing your credit cards to insure that you are just not moving debt around but are actually paying it off.

It is also important that you dont run the credit cards up again after you get them paid down.

Re: BOA Loan vs. 401K Loan

Anonymous — Mon, 30 Jun 2008 13:23:20 GMT

While most experts would say never use this as an option, I highly disagree. Who better to pay back interest but to yourself!! Think about it if you go to the back for a loan your paying the bank back the interest, yet if you take a LOAN from your money (401K) your paying yourself back. I think people ususally mix a loan with a a withdrawal which then you would have to pay the taxes on the money you take out. So the question I ask do you keep paying BOA 22+% or do you borrow money from yourself and pay yourself back at 6% interest. Do the math!! Get rid of the BOA!!

Re: BOA Loan vs. 401K Loan

marty56 — Mon, 30 Jun 2008 17:00:01 GMT

Camille, I sent you a PM.

Re: BOA Loan vs. 401K Loan

Lel — Mon, 30 Jun 2008 20:13:42 GMT

@Anonymous wrote:
While most experts would say never use this as an option, I highly disagree. Who better to pay back interest but to yourself!! Think about it if you go to the back for a loan your paying the bank back the interest, yet if you take a LOAN from your money (401K) your paying yourself back. I think people ususally mix a loan with a a withdrawal which then you would have to pay the taxes on the money you take out. So the question I ask do you keep paying BOA 22+% or do you borrow money from yourself and pay yourself back at 6% interest. Do the math!! Get rid of the BOA!!

Since it is highly unlikely that your 401(k) is going to have a 22% rate of return, taking a loan from your retirement fund is a reasonable thing to do.

Many people talk about the "benefit" of paying interest to yourself, but it's not as neat as it seems on the surface. When you borrow from your 401(k), you have to pay it back with after-tax dollars. The interest is also paid with after-tax dollars. When you start receiving distributions from your 401(k), you have to pay tax on the distributions, since your original contributions were tax-deferred. There is no distinction between original contributions and those that you "paid back" to yourself. The net effect is that the money that you pay back into your 401(k) is taxed twice.

Re: BOA Loan vs. 401K Loan

Anonymous — Mon, 30 Jun 2008 20:21:54 GMT

I would not recommend taking a 401K loan to pay off CC debt. When you take money from your 401K you are going to be taxed twice on it. You are taxed when you withdraw it and again you have to pay a penalty tax at the end of the year to the IRS. This is tax free money! Why mess with that? I'd look for another alternative before ever withdrawing from your retirement account. Take the extra money you'd use to pay off the 401K loan and put it towards your CC debt.

Message Edited by kball64 on 06-30-2008 03:21 PM

Re: BOA Loan vs. 401K Loan

fishbjc — Tue, 01 Jul 2008 00:46:05 GMT

She's not taking a withdrawal...it's a LOAN. It's not-taxable unless she defaults on it.

Re: BOA Loan vs. 401K Loan

fishbjc — Tue, 01 Jul 2008 00:47:02 GMT

Camille: I'd definitely try the CCCS route. They reduced my cc interest to 4%.

Re: BOA Loan vs. 401K Loan

marty56 — Tue, 01 Jul 2008 01:38:59 GMT

My CCCS reduced the BofA account interest to 10%. I dont know if they would work on a gold option account though. I had great like in DMP except for BofA. Since I graduated DMP I was able to get a prime Visa card and a great auto loan.

Re: BOA Loan vs. 401K Loan

BuckiRob — Tue, 01 Jul 2008 16:21:16 GMT

I can not more strongly disagree with Dave Ramesy on this. When you take a loan, it must be paid back in full in 5 years OR LESS. Secondly, the interest you pay on the loan goes to YOUR 401k balance not to the plan, not to a bank and not to your employeer.

If you have not been using your CC for a considerable amount of time then this is a good move. These so called experts are dispensing this advice in a vaacum. They are saying this because often times, people take these loans, pay off the balances and continue to use their cards and 2 years down the road, they have a 401K loan they are paying off and have new CC balances they have run up.

If you have disciplined yourself to STOP using your CC and are getting raped on the interest rate, it makes total sense to use a 401K loan and pay yourself the interest. Right now yoru loan rate is probably under 6%

This ONLY works if you have STOPPED using yoru Credit Cards.

Re: BOA Loan vs. 401K Loan

BuckiRob — Tue, 01 Jul 2008 16:50:42 GMT

LeI,

401K loans are NOT treated as distributions from retirement plans for tax purposes. I have a 401K loan current, one that is almost completely paid back. My plan, the IRS and my account have never been asked or compelled to reflect my loan in any of my tax filings so you most certainly DO NOT treat the loan as a "distribution."

Distributions out of qualified plans or IRS are taxed as current income. The IRS applies a 10% penalty for those individuals under age 59 1/2 unless the distribution meets certian early with draw provisions as mandated by the IRS.

Loan payments are made with after tax dollars that part of what you said is correct. I find that to be a completely moot point since credit card payments are also made with after tax dollars. The only time you run into issues with loands being treated as a distribution is if you do not pay the loan back. Most plan documents require the employer to withhold the payment. Most plans do not allow you to make payments with personal checks as well.

Given the option to pay a credit card company 22% or take a loan out of your 401K and pay back your 401K balance the money thats a pretty easy choice PROVIDED YOU HAVE STOPPED USING CREIDT CARDS FOR AN APPREICIABLE PERIOD OF TIME. In other words for SEVERAL months you have learned to live within your means. You do not use your credit cards for ANYTHING.

In that situation taking a loan makes all the sense in the world. At 22% money doubles every 3.27 years on a 20K balance the credit card will have collected almost 30K of interest in 5 years vs having paid off the 20 AND collected almost 10K of interest that is added to your 401K balance... Now tell me what a bad deal the 401K loan is....

Re: BOA Loan vs. 401K Loan

Lel — Tue, 01 Jul 2008 17:31:43 GMT

@BuckiRob wrote:
LeI,
401K loans are NOT treated as distributions from retirement plans for tax purposes. I have a 401K loan current, one that is almost completely paid back. My plan, the IRS and my account have never been asked or compelled to reflect my loan in any of my tax filings so you most certainly DO NOT treat the loan as a "distribution."
Distributions out of qualified plans or IRS are taxed as current income. The IRS applies a 10% penalty for those individuals under age 59 1/2 unless the distribution meets certian early with draw provisions as mandated by the IRS.
Loan payments are made with after tax dollars that part of what you said is correct. I find that to be a completely moot point since credit card payments are also made with after tax dollars. The only time you run into issues with loands being treated as a distribution is if you do not pay the loan back. Most plan documents require the employer to withhold the payment. Most plans do not allow you to make payments with personal checks as well.
Given the option to pay a credit card company 22% or take a loan out of your 401K and pay back your 401K balance the money thats a pretty easy choice PROVIDED YOU HAVE STOPPED USING CREIDT CARDS FOR AN APPREICIABLE PERIOD OF TIME. In other words for SEVERAL months you have learned to live within your means. You do not use your credit cards for ANYTHING.
In that situation taking a loan makes all the sense in the world. At 22% money doubles every 3.27 years on a 20K balance the credit card will have collected almost 30K of interest in 5 years vs having paid off the 20 AND collected almost 10K of interest that is added to your 401K balance... Now tell me what a bad deal the 401K loan is....

I meant to say that distributions at time of retirement are taxed. I know that proceeds from loans are not taxed; I did a short-term loan several years back that I didn't have to pay tax on. I do not consider a 401(k) loan to be a "distribution", but I acknowledge that I wasn't clear about that.

I agree with you that paying down the higher interest rate CC is a good idea - that's what I said in my original post. Specifically, I said, "Since it is highly unlikely that your 401(k) is going to have a 22% rate of return, taking a loan from your retirement fund is a reasonable thing to do."

The purpose of my second paragraph is to demonstrate that the "you pay interest to yourself" mantra isn't all that it's made out to be.

Think of it this way: let's say that you take out a $10,000 loan and pay $600 in interest payments in addition to principal. That interest that you pay is with after-tax dollars. It sounds great - you're paying yourself, no some bank. But what happens when you retire and start taking out money? That $600 dollars gets taxed by the government again. So even though you already paid tax on the interest you paid to yourself, the government takes another bite when you retire. That $600 you could have stashed away in your mattress is now $400 (assuming a combined federal and state tax of 33%). You lose money on the deal, in addition to the lost capital gains from the temporary absence of your money from the plan.

But still, paying down debt of high interest CC is an important immediate term goal for anyone, and will definitely save money. I just think that people should be fully aware of the real implications of 401(k) loans. In the case of the OP, like I clearly said in my first post on this thread, a 401(k) loan is a reasonable thing to do. But 401(k) loans are not always the best option.