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Loans against 401K

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Frequent Contributor

Loans against 401K

With this new section, I figured I would bring this topic up for people to chime in on.  

 

Is it smart to take a loan against your 401k towards a downpayment or to pay off debt?

 


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Valued Member

Re: Loans against 401K

Guess it depends on your situation. Im not even close to knowedgeable in that area, however i know my companys intrest rate is 4.5% but it all goes back into my account including the intrest. Now im generating 6.5% in YTD return so i dont know how much your really losing out on. Peronally it worked great for me i had 3 balances with 25.99% intrest so definitly worth it.


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New Contributor

Re: Loans against 401K

I defintiely depends on the situation.  How much is in your 401K? How old are you? How much debt do you have? Do you have other accounts that you could use to pay off this debt? How much is in your savings?

 

 

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Valued Contributor

Re: Loans against 401K


@denver133 wrote:

With this new section, I figured I would bring this topic up for people to chime in on.  

 

Is it smart to take a loan against your 401k towards a downpayment or to pay off debt?

 


There's no blanket "yeah or nay" answer for this question, although it's a good question!  A lot of it depends on the 401(k) plan, how it's administered, what the employer allows as acceptable.  Some plans will only allow for 1 loan at a time; others may allow for multiple loans. How much do you have in your 401(k)?  There can be limits as to how much you can borrow, usually up to 50% of your contributions.  And 401(k) loans have terms that are far better than traditional lenders, but with a caveat.

 

You have to pay it back, and in a rather timely manner. Yes, you are paying yourself back, but the loan essentially is only as good as your employment.  IF you are employed and remain employed for the life of the loan, it can be a good deal.  But if you leave your employment, the loan comes due, usually within 30 days; some plans may have differing terms, but the bottom line is it will have to be paid back in full in a relatively short period of time.  If not paid back, it's treated as a dispersement.

 

AND if you are under 59.5 in age, there is also the penalty for withdrawal as well as the taxes you have to pay.  At that point, the loan becomes a dispersement, and is taxed accordingly.  Depending on the time of year and how much you have made in salary to date, that tax can be significant.  If you are OLDER than 59.5, then you only have to pay the tax and not the penalty. 

 

Only you can decide if it's worth it to you.  If it's a situation where you know you will pay it back in a very short time period and your employment is secure, then it can be beneficial.  If it's going to be more long term, I would give that some serious thought before doing it.  Do the potential positives outweigh the negatives? 

 

 

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