How to pay off a 401k Loan?

[Citylights18]

One trick to paying off a 401k loan is to remember is that any dollar you pay to it pays back to your account.

For instance if you had a 50k loan out against an existing 100k balance and you lost your job and had to pay it back how would you handle it? Would you pay it the 50k back in full?

100k in the 401k, 50k loan

Pay 50k from line of credit.

150k now in 401k, 50k debt owed.

The question is do you have the 50k sitting around for this type of operation. Another way to do it, particualrly if you'll still be walking away with a six figure 401k is by dividing what you owe in half, two 25k increments. Pay 25k from a checking account to put 25,000 back into your 401k to increase it to 125k. Then use 25k of proceeds from the 401k to pay off the other half.

100k in 401k, 50k loan

Pay 25k from line of credit

Pay 25k out of 401k fund

100k in 401k, 25k debt owed.

Doing it this way you walk out with a smaller 401k fund but still substantial. However that cuts your debt in half if that is a particular issue as to how to pay it off. 100k in the 401k is still enough to have substantial money for trading and growth. If you had 300k in there you might want to just payoff the full 50k loan from the proceeds and move on. 

If you repaid the 50k loan out of the 100k 401k directly you'll be left with 50,000. That will hurt your money growth much more with only 50,000 available in your retirement plan.

100k in 401k, 50k loan

Pay 50k out of 401k fund

50k in 401k

[AndySoCal]

@Citylights18  Ask your plan administrator or HR

[Citylights18]

I'm throwing out some examples for the sake of discussion.

I think 401k loans are a good tool if you know how to use them right.

[CreditCuriosity]

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@Citylights18 wrote:

I'm throwing out some examples for the sake of discussion.

I think 401k loans are a good tool if you know how to use them right.

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Each scenario is different, but general rule of thumb is leave a 401k alone unless needed and no other methods to come up with cash.

[Citylights18]

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@CreditCuriosity wrote:

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@Citylights18 wrote:

I'm throwing out some examples for the sake of discussion.

I think 401k loans are a good tool if you know how to use them right.

---

Each scenario is different, but general rule of thumb is leave a 401k alone unless needed and no other methods to come up with cash.

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You pay the interest back to yourself on 401k loans. If you are otherwise just going to lose the 401k money on the market it might not be a bad move. The rates now are about 10%. On a $50,000/5 year note that pays you back interest starting at $427 a month. One could refinance up a 401k loan to a higher interest rate if they so desired.

One limiting factor is term. I believe most 401k loans limit yourself to 5 years. There are cerain home loan provisions that allow for 15 or 20 year financing.

[CreditCuriosity]

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@Citylights18 wrote:

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@CreditCuriosity wrote:

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@Citylights18 wrote:

I'm throwing out some examples for the sake of discussion.

I think 401k loans are a good tool if you know how to use them right.

---

Each scenario is different, but general rule of thumb is leave a 401k alone unless needed and no other methods to come up with cash.

---

You pay the interest back to yourself on 401k loans. If you are otherwise just going to lose the 401k money on the market it might not be a bad move. The rates now are about 10%. On a $50,000/5 year note that pays you back interest starting at $427 a month. One could refinance up a 401k loan to a higher interest rate if they so desired.

One limiting factor is term. I believe most 401k loans limit yourself to 5 years. There are cerain home loan provisions that allow for 15 or 20 year financing.

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I understand how 401k loans work.   Anytime you have money in the market it goes up and down etc as not all positives in the market as anyone should know.  One thing I do if I think the market is towards the top is I put it into cash equivant fund and let the overvalued funds I have whether SP500 or Nasdaq etc adjust accordingly and not "lose" money then readjust.  Granted no one can time the market perfect or we all would be millionaires many times overs.  Also one doesnt lose money until money is cashed out this holds true to 401k, stocks, etc.

[Citylights18]

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@CreditCuriosity wrote:

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@Citylights18 wrote:

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@CreditCuriosity wrote:

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@Citylights18 wrote:

I'm throwing out some examples for the sake of discussion.

I think 401k loans are a good tool if you know how to use them right.

---

Each scenario is different, but general rule of thumb is leave a 401k alone unless needed and no other methods to come up with cash.

---

You pay the interest back to yourself on 401k loans. If you are otherwise just going to lose the 401k money on the market it might not be a bad move. The rates now are about 10%. On a $50,000/5 year note that pays you back interest starting at $427 a month. One could refinance up a 401k loan to a higher interest rate if they so desired.

One limiting factor is term. I believe most 401k loans limit yourself to 5 years. There are cerain home loan provisions that allow for 15 or 20 year financing.

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I understand how 401k loans work.   Anytime you have money in the market it goes up and down etc as not all positives in the market as anyone should know.  One thing I do if I think the market is towards the top is I put it into cash equivant fund and let the overvalued funds I have whether SP500 or Nasdaq etc adjust accordingly and not "lose" money then readjust.  Granted no one can time the market perfect or we all would be millionaires many times overs.  Also one doesnt lose money until money is cashed out this holds true to 401k, stocks, etc.

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Yeah you could put it into a cash equivalent fund when the market is high. I am doing that. I'm not claiming you don't understand it here, just elaborating for the thread audience.

But I'm also milking interest on a 401k loan which allows me to put away a greater contribution back to my 401k. At my company I'm putting away the minimum for the match but then getting another couple percent of interest on my 401k loan.

If the discount rate moves up to 7% that could mean 7% on a money market account and 12% on a 401k loan. One could just borrow sums on money for the benefit of the return then pay it back when financial conditions change. Its better than sticking money it into the 401k cash fund, provided that you can handle the monthly payment. Also how big of a loan you are taking and how much that loan is relative to your balance of course.

[Citylights18]

Another example of what I'm talking about:

A) Twenty year home loan of 50,000 from 401k. (at 4.25%)

Monthly payment: $309.62

Interest payment month 1: $177.08

Interest payment month 61: $145.76

Balance at month 61: $40,993.21

How does that balance look if refinanced into a 5 year 401k loan?

A) $40,993.21 Balance at month 61 refinanced (at 12%)

Monthly payment: $911.87

Interest payment month 1: $409.93

You are commiting to socking away an extra $264.41 a month in 401k  interest while you are paying an extra $338.08 against the loan. The interest from the loan is an alternative to increasing your 401k contribution percentage. Then also you're reducing the length of the 401k loan from 15 years to 5 years, accelerating the payoff.

Could work for someone with higher income too who is already maxed out on how much they could contribute as a percentage. Parking 50k in a money market at 7 percent and 12% interest on 50,000 for 5 years into the 401k.

At year 5

1) 16,733.40 additional interest in 401k at 12%.

2) 17,500 interest on the 7% money market.

Total Return $34,233.40 (68.5%)

This play of course works best if the Fed discount rate moves up to 7% and rates on the money market could fluxuate and only pay out a higher 7% rate for a limited time. Its also not taxed advantaged money, the interest and payment are directly from your paycheck.

[Anonymous]

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@Citylights18 wrote:

One trick to paying off a 401k loan is to remember is that any dollar you pay to it pays back to your account.

For instance if you had a 50k loan out against an existing 100k balance and you lost your job and had to pay it back how would you handle it? Would you pay it the 50k back in full?

100k in the 401k, 50k loan

Pay 50k from line of credit.

150k now in 401k, 50k debt owed.

The question is do you have the 50k sitting around for this type of operation. Another way to do it, particualrly if you'll still be walking away with a six figure 401k is by dividing what you owe in half, two 25k increments. Pay 25k from a checking account to put 25,000 back into your 401k to increase it to 125k. Then use 25k of proceeds from the 401k to pay off the other half.

100k in 401k, 50k loan

Pay 25k from line of credit

Pay 25k out of 401k fund

100k in 401k, 25k debt owed.

Doing it this way you walk out with a smaller 401k fund but still substantial. However that cuts your debt in half if that is a particular issue as to how to pay it off. 100k in the 401k is still enough to have substantial money for trading and growth. If you had 300k in there you might want to just payoff the full 50k loan from the proceeds and move on. 

If you repaid the 50k loan out of the 100k 401k directly you'll be left with 50,000. That will hurt your money growth much more with only 50,000 available in your retirement plan.

100k in 401k, 50k loan

Pay 50k out of 401k fund

50k in 401k

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It's been a long time but.... if you repay the loans out the 401(k) directly, if you don't meet age and other qualifications, doesn't this count as a withdrawal, with tax and possible 10% penalties?   If not, it seems there would be a large loophole!

[iced]

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@Citylights18 wrote:

Another example of what I'm talking about:

A) Twenty year home loan of 50,000 from 401k. (at 4.25%)

Monthly payment: $309.62

Interest payment month 1: $177.08

Interest payment month 61: $145.76

Balance at month 61: $40,993.21

How does that balance look if refinanced into a 5 year 401k loan?

A) $40,993.21 Balance at month 61 refinanced (at 12%)

Monthly payment: $911.87

Interest payment month 1: $409.93

You are commiting to socking away an extra $264.41 a month in 401k  interest while you are paying an extra $338.08 against the loan. The interest from the loan is an alternative to increasing your 401k contribution percentage. Then also you're reducing the length of the 401k loan from 15 years to 5 years, accelerating the payoff.

Could work for someone with higher income too who is already maxed out on how much they could contribute as a percentage. Parking 50k in a money market at 7 percent and 12% interest on 50,000 for 5 years into the 401k.

At year 5

1) 16,733.40 additional interest in 401k at 12%.

2) 17,500 interest on the 7% money market.

Total Return $34,233.40 (68.5%)

This play of course works best if the Fed discount rate moves up to 7% and rates on the money market could fluxuate and only pay out a higher 7% rate for a limited time. Its also not taxed advantaged money, the interest and payment are directly from your paycheck.

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While it's true the interest you pay on the loan goes into your account, you can't double dip and call it interest earned. If anything, it's just an additional contribution. The whole robbing the tax-advantaged Peter to invest in taxable Paul aspect is also questionable.

Unless one has a short-term emergency which they cannot possibly meet with external funds, there are very few if any reasons to take out a 401k loan. Too much risk, too little reward.