Use 401k loan option to save on interest??

[Doc1647545523]

So you paid yourself back a loan with post tax dollars that will be taxed again when you withdraw it at retirement and you see no downside to that? Unless you're in the 0% tax bracket, you just cost yourself money. You're way better off deferring pre-tax money into your 401k. 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 that same amount; by roughly 19% or more depending on your tax bracket.

 

I don't follow your reasoning here, Tim. As I see it, the 401k money was not taxed when it was deposited in the 401k, was not taxed when you took it out as a loan to yourself, but is eventually taxed when you withdraw it at retirement (although likely at a lower rate than when you earned it, depending on your other income, deductions, and prevailing tax rate). That all equals being taxed just once.

 

If you don't borrow from your 401k, then withdraw it during retirement, it's still just taxed once.

 

[V8 Beast]

The math still puts me ahead even with tax. I called them this morning to double check. The loans the best move.

[TTQ B4U]

I don't follow your reasoning here, Tim. As I see it, the 401k money was not taxed when it was deposited in the 401k, was not taxed when you took it out as a loan to yourself, but is eventually taxed when you withdraw it at retirement (although likely at a lower rate than when you earned it, depending on your other income, deductions, and prevailing tax rate). That all equals being taxed just once.

 

If you don't borrow from your 401k, then withdraw it during retirement, it's still just taxed once.

 

I edited and clarified my initial post to show that the interest portion is what is essentially taxed twice and that is the case. The loan amount is borrowed at the same rate it's re-contributed, but the interest paid is from post tax dollars, grows tax deferred and will be taxed a second time upon withdrawal.

 

To me the real cost in the futures. Especially in today's market where essentially everything is on sale. The drawback here is that the funds borrowed will lose the potential to gain value and IMO if you're investing in the right stuff today (buying low) you are really costing yourself a lot of future earnings. I saw very, very nice gains on my 401k distributions over the past 12 months. No way I would remove $10k from the market to try and save a few bucks. Especially given the risk of today's job market. This job market also puts 401k borrows are extreme risks given a job change happening.

 

The other aspect of this type of loan compared to say even a home equity line of credit which does not get taxed twice, and in fact is tax advantaged, giving you additional write-offs. My insight would be max out your 401k, especially if there's a company match and even more so if you're fully vested. If your income level allows, open a ROTH. When we were younger and just starting out opening our own ROTH IRA's was a great move for us. Now while we aren't able to still contribute to one, we are still able to withdraw all that principle without issue and still maintain the accounts and the growth realized in them. Hopefully we never have to though.

Edited May 15, 2012 by TTQ B4U

[V8 Beast]

I did find a lot of whats being done with my money on the company side can be better distributed. I just gave them the money and did periodic checks but never deep dived into it.

[TTQ B4U]

I did find a lot of whats being done with my money on the company side can be better distributed. I just gave them the money and did periodic checks but never deep dived into it.

 

Get with your financial planner. Our guy reviews my 401k to insure it's being distributed to the best funds and has cart-blanch with me to change it to work out, thus why mine kicked ass last year. We meet with him quarterly to over our portfolio. He also consults with our tax people to insure we're on track to not owe or to have paid in too much.

 

My wife who you know is a bankruptcy attorney, also chimed in to warn you (others) that loans from 401k's expose you to even further risk as that money is no longer protected from the courts should you go belly up.

 

Risk/Reward.

[TTQ B4U]

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.

 

The math still puts me ahead even with tax. I called them this morning to double check. The loans the best move.

 

You have PM with ADP's own link to calculate the program for yourself. I plugged in some very conservative numbers of only $300mo contribution, 5% 401k growth and balanced that against your 4.25% rate and you still come out nearly $1,200 lower in total earnings by doing a traditional loan at 6.5%.

 

As noted in my PM, I highly doubt your 401k is only pulling in 5%. If you're not double that, then you need to kick your employer in the balls. You're younger than me and I plugged you in at age 42 and retiring at 67 and got the above results. Even if you retire at 60 the difference is huge.

 

I plugged in my numbers shared via PM and here's what it would cost me right now to do a 3yr loan against my 401k for a $10k loan at a mere 4.25% As you can see, I won't be borrowing against it for anything as the future earnings get killed. Now granted I max out my contributions and you may not but, I bet you'll impacted much greater than you might have initially calculated.

 

 

http://www.pbase.com/timothylauro/image/143321815/original.jpg

Edited May 15, 2012 by TTQ B4U