V8 Beast Posted May 13, 2012 Report Share Posted May 13, 2012 I was playing around in my 401k and noticed the interest rate for a loan against my savings is less than what I have for my car. To be more specific its 4.25% instead of the current 6.5% on a $10k loan. The raw numbers make me think why not, but at the same time I dont know what taxes could accrue and wipe out the benefit. Its only a drop in the pan of my total 401k. Its one of those things where I dont have to do it, but if I can save $1 then why not... ya know. Any insight would be appreciated. Quote Link to comment Share on other sites More sharing options...
Doc1647545523 Posted May 13, 2012 Report Share Posted May 13, 2012 If your 401k is set-up like mine, it may work out to your favor. Here are some potential advantages: 1) It does not show on a credit report as a loan 2) You're paying yourself the interest (the money is not lost to you) However, if your 401k is currently invested in a product earning more than your exisiting loan rate, I'm not sure you would net-out ahead. I would also check to see what fees may apply. Mine were low (IIRC $50 on a 50k loan). Perhaps the financial experts on here can chime-in with other views, but I've borrowed from my 401k before and found it to be no hassle. Quote Link to comment Share on other sites More sharing options...
V8 Beast Posted May 13, 2012 Author Report Share Posted May 13, 2012 If your 401k is set-up like mine, it may work out to your favor. Here are some potential advantages: 1) It does not show on a credit report as a loan 2) You're paying yourself the interest (the money is not lost to you) However, if your 401k is currently invested in a product earning more than your exisiting loan rate, I'm not sure you would net-out ahead. Perhaps the financial experts on here can chime-in with other views, but I've borrowed from my 401k before and found it to be no hassle. Thats what I was missing. If its pulled out I wont be able to gain money on investments. I'll have to see how much money I typically make and see if that 2% will cover the possible gains. Thanks Doc!!!! So after a quick look I would end up better off with the loan as long as the market doesnt kick into high gear over the next year and a half. Unless the pro's have a different opinion it looks to be a definite way to save some change while the investments are a possible. Quote Link to comment Share on other sites More sharing options...
Littleguy Posted May 13, 2012 Report Share Posted May 13, 2012 If it's just a small part of your 401K, the fee's aren't high, and it makes you feel better keeping the money in your own pocket I'd say do it. That being said I have a very positive outlook for the market in the next couple of years. Quote Link to comment Share on other sites More sharing options...
2highpsi Posted May 13, 2012 Report Share Posted May 13, 2012 If you have good credit (over 720) you are better off not doing it. With your age most of your 401k is probably in growth and income mutual funds. The way they accumulate wealth is pretty simple. They pay dividends that reinvest and buy you more shares. When you take a loan out, on top of losing potential share price increases, you lose your dividends and stop accumulating shares. Think really long term. 401k money is for retirement. Any time you mess with it, you just pushed your retirement back. Only in very extreme (near emergency) circumstances should 401k money be borrowed against, pulled out, or the like. Quote Link to comment Share on other sites More sharing options...
Patterson Posted May 13, 2012 Report Share Posted May 13, 2012 I did a loan just as the crash 08/09 was happening. i paid 6% on it, but it went directly back into my plan. So in reality I was paying myself to borrow money from myself. In my eyes there is no real downside to it. Quote Link to comment Share on other sites More sharing options...
2highpsi Posted May 13, 2012 Report Share Posted May 13, 2012 I did a loan just as the crash 08/09 was happening. i paid 6% on it, but it went directly back into my plan. So in reality I was paying myself to borrow money from myself. In my eyes there is no real downside to it. Let's say you had 1000 shares of XYZ mutual fund trading at $20 pre crash with an effective dividend yield rate of 4%. That produced a $800 dividend. That doesn't change when the share price got cut in half,... It still produced an $800 dividend. But now shares were only $10. So you missed out on 80 shares. Once the share price got back to $20 (as they all did,... Just the dividend reinvestment from that ONE year cost you $1600. Not including any other years dividends or growth you missed. It's hard to explain on here,... Especially typing it on my phone,.. hopefully you get the jist of it. Quote Link to comment Share on other sites More sharing options...
Patterson Posted May 13, 2012 Report Share Posted May 13, 2012 Let's say you had 1000 shares of XYZ mutual fund trading at $20 pre crash with an effective dividend yield rate of 4%. That produced a $800 dividend. That doesn't change when the share price got cut in half,... It still produced an $800 dividend. But now shares were only $10. So you missed out on 80 shares. Once the share price got back to $20 (as they all did,... Just the dividend reinvestment from that ONE year cost you $1600. Not including any other years dividends or growth you missed. It's hard to explain on here,... Especially typing it on my phone,.. hopefully you get the jist of it. There wasn't a penalty when the loan was made. It's not like making a hardship withdrawal. I was still paying into it like normal along with the repayment of the loan. Quote Link to comment Share on other sites More sharing options...
2highpsi Posted May 13, 2012 Report Share Posted May 13, 2012 There wasn't a penalty when the loan was made. It's not like making a hardship withdrawal. I was still paying into it like normal along with the repayment of the loan. I understand there wasn't a penalty. However your money was removed from the market during the loan. You didn't receive any dividends on the money you borrowed against. It cost you significantly more than you realize Quote Link to comment Share on other sites More sharing options...
Patterson Posted May 13, 2012 Report Share Posted May 13, 2012 I understand there wasn't a penalty. However your money was removed from the market during the loan. You didn't receive any dividends on the money you borrowed against. It cost you significantly more than you realize True, the money withdrawn wasn't earning dividends, but it went to a greater cause. I was okay with the little loss I took initially. I guess a better way to put it is unless you don't need to do it don't. Quote Link to comment Share on other sites More sharing options...
HotCarl Posted May 13, 2012 Report Share Posted May 13, 2012 If you have good credit (over 720) you are better off not doing it. With your age most of your 401k is probably in growth and income mutual funds. The way they accumulate wealth is pretty simple. They pay dividends that reinvest and buy you more shares. When you take a loan out, on top of losing potential share price increases, you lose your dividends and stop accumulating shares. Think really long term. 401k money is for retirement. Any time you mess with it, you just pushed your retirement back. Only in very extreme (near emergency) circumstances should 401k money be borrowed against, pulled out, or the like. Exactly what i was going to say. If you don't need it for an absolute emergency then there's no reason to do it. I made the mistake of messing with my retirement funds a few years ago when i was unemployed and still regret it. If i need or want something that cost's 10k then i work more to earn the 10k and save for it rather than hurting myself in the long run. Maybe someone else can correct me if I'm wrong but don't you pay taxes when borrowing against your 401k? Quote Link to comment Share on other sites More sharing options...
Mensan Posted May 13, 2012 Report Share Posted May 13, 2012 Let's say you had 1000 shares of XYZ mutual fund trading at $20 pre crash with an effective dividend yield rate of 4%. That produced a $800 dividend. That doesn't change when the share price got cut in half,... It still produced an $800 dividend. But now shares were only $10. So you missed out on 80 shares. Once the share price got back to $20 (as they all did,... Just the dividend reinvestment from that ONE year cost you $1600. Not including any other years dividends or growth you missed. It's hard to explain on here,... Especially typing it on my phone,.. hopefully you get the jist of it. Do you have a $10/share stock paying .80 dividends per quarter? Quote Link to comment Share on other sites More sharing options...
Doc1647545523 Posted May 13, 2012 Report Share Posted May 13, 2012 Maybe someone else can correct me if I'm wrong but don't you pay taxes when borrowing against your 401k? You're thinking about when you prematurely withdraw funds from your 401k. In that case, you're taxed. Borrowing from a 401k does not change your taxes. Quote Link to comment Share on other sites More sharing options...
944s2 Posted May 13, 2012 Report Share Posted May 13, 2012 If the money you take out of your 401k for a loan CANNOT earn interest in the market while repaying that loan I would NOT do it... Like everyone else has said, unless it's an emergency I wouldn't mess with my retirement money. BTW I made 12%+ last quarter on my 401k at 100% high risk I also think the market is going to do well in the next few years and would put/keep as much money in as you can. Quote Link to comment Share on other sites More sharing options...
2highpsi Posted May 13, 2012 Report Share Posted May 13, 2012 Do you have a $10/share stock paying .80 dividends per quarter? When the Dow was 7000 there were quite a few. Quote Link to comment Share on other sites More sharing options...
2highpsi Posted May 13, 2012 Report Share Posted May 13, 2012 Do you have a $10/share stock paying .80 dividends per quarter? Didn't realize you said per quarter. I was talking about an annual yield, and all the example numbers were based as such. Quote Link to comment Share on other sites More sharing options...
Mensan Posted May 13, 2012 Report Share Posted May 13, 2012 When the Dow was 7000 there were quite a few. Yes, but as per your example none that I know of maintained what they WERE paying. The point I'm making is your example is a bit extreme. Quote Link to comment Share on other sites More sharing options...
V8 Beast Posted May 13, 2012 Author Report Share Posted May 13, 2012 Thats what I was thinking. That 10k right now is not doing that for me.. wish it were. I was reading further, you know my age? Damn spies lol! Quote Link to comment Share on other sites More sharing options...
2highpsi Posted May 13, 2012 Report Share Posted May 13, 2012 Yes, but as per your example none that I know of maintained what they WERE paying. The point I'm making is your example is a bit extreme. Your right, it may have been slightly exaggerated and on the extreme side, and I was using estimated figures, but the basis of the concept is what I was really trying to get through. Quote Link to comment Share on other sites More sharing options...
2highpsi Posted May 13, 2012 Report Share Posted May 13, 2012 Thats what I was thinking. That 10k right now is not doing that for me.. wish it were. I was reading further, you know my age? Damn spies lol! I'm actually watching you right now..... When I said given your age I meant under the age of 40. Retirement strategy is pretty much the same for anyone that young. I guess I just assumed you were somewhere in your early 30s from different posts you've made. I could be way off though. Quote Link to comment Share on other sites More sharing options...
V8 Beast Posted May 13, 2012 Author Report Share Posted May 13, 2012 I'm actually watching you right now..... When I said given your age I meant under the age of 40. Retirement strategy is pretty much the same for anyone that young. I guess I just assumed you were somewhere in your early 30s from different posts you've made. I could be way off though. No, you are right.. damn spy :masturboy: Quote Link to comment Share on other sites More sharing options...
V8 Beast Posted May 14, 2012 Author Report Share Posted May 14, 2012 So after a little more math and forecasting by the time the money was put back the loan would actually save me more money than I am expected to gain. In the end its only a few hundred, but that still money in my pocket. Im on pace now to retire when Im 50-55 so Im not too worried about it impacting that. The 401k is only one of my retirement funds. I was told young not to trust one source with my future. Plus Im still hoping for the rich kid scenario to play out Quote Link to comment Share on other sites More sharing options...
RangerTurbo Posted May 14, 2012 Report Share Posted May 14, 2012 You a member of a credit union? What are their rates for loans or to refi your car? (I assume that is your plan?) My credit union is doing cars 03 and newer at 1.99% right now for 60 months. Im in Utah, so its not gonna apply to you, but what are they offering around your area? EDIT: Well, their site will make a liar out of me, as they jumped to 2.69%, but was 1.99% last weekend. Heres their site so I don't look like I'm lying Quote Link to comment Share on other sites More sharing options...
TTQ B4U Posted May 14, 2012 Report Share Posted May 14, 2012 (edited) I was playing around in my 401k and noticed the interest rate for a loan against my savings is less than what I have for my car. To be more specific its 4.25% instead of the current 6.5% on a $10k loan. The raw numbers make me think why not, but at the same time I dont know what taxes could accrue and wipe out the benefit. Its only a drop in the pan of my total 401k. Its one of those things where I dont have to do it, but if I can save $1 then why not... ya know. Any insight would be appreciated. You're not likely saving a dollar as you're paying your own loan back with after tax dollars and then when you withdraw it, it's being taxed again. Double taxes on the interest you are paying doesn't equal a good move. In the end you are paying taxes twice ona portion of the money you use to repay the loan, which drives up the effective cost of borrowing from your 401k. Didn't you at one time discuss possibly looking for another job? If you do, you'll have to pay the loan back in full within 60 days. If you aren't able to do that, that amount will be seen as a full distribution that you will pay income tax on and likely another 10 percent penalty. You're better off taking the $10 out of a savings account you have and paying that account back. Personally, I would never do anything that limits you funding your retirement. Edited May 14, 2012 by TTQ B4U Quote Link to comment Share on other sites More sharing options...
TTQ B4U Posted May 14, 2012 Report Share Posted May 14, 2012 (edited) i paid 6% on it, but it went directly back into my plan. So in reality I was paying myself to borrow money from myself. In my eyes there is no real downside to it. So you paid yourself back a loan where the interest amount is being taxed twice and that was not real downside? Unless you're in the 0% tax bracket, you just paid more income tax on that interest rate amount thought to have been saved vs traditional lenders. IMO, You're way better off deferring pre-tax money into your 401k, especailly in a down market where those investment dollars buy more. Even if you took post tax money and put it into a ROTH you'll come out way ahead. You can withdraw ROTH Principle at anytime without issue too so you won't be paying double taxes if you use that money. Lastly, just take post tax income and pay the slightly higher interest rate on money borrowed. In the end, it's way better than paying double income taxes on the interest for the amount you're borrowing and taking so many very high risks with your retirement money. Edited May 15, 2012 by TTQ B4U Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.