401k loan,a good deal?

[mathjak107]

a co worker told me he is taking a 401k loan because its a great deal.basically they sell off your position and loan you the money..you pay it back over 5 years paying 8% interest to yourself...im realizing though this may be not such a good deal..you are paying taxes 2x on the interest.once when you earn it and put the after tax money back into the 401k and then again when you withdraw it later on...am i missing something here?

your not saving the interest either...your giving up the gains on your 401k that you borrowed and merely took funds out of your taxable money and moved them as interest to the 401k ...

 

[Outtahere]

You are absoutely correct, you miss any gains over that five years, you pay back the money after taxes and then are taxed again when you withdraw it. I try to explain this time and time again to the people here but they just don't get it.

The only way I would take money out of the 401k is if it were a dire need or I could make an investment the would far out do what ever gains I might miss.

 

[soupcxan]

No, it's not a good idea in most cases, but that doesn't stop people from doing it anyway.

Do you know what he's buying with the money? A large depreciating asset like a new luxury car?

 

[KB]

Also, I believe if he leaves his employment he only has a short time period to repay the loan (maybe 60 days), or it is considered a withdrawal and taxed along with the 10% penalty.

 

[Outtahere]

That's right, the loan comes due if they leave the job.

 

[setab]

I did it once a few years back and it is a big mistake for all the reasons mentioned above and probably a few more.

setab

 

[Outtahere]

I did it too but the return on the investment I bought into far far exceeds anything I would have gained had I not.

 

[audreyh1]

You are absoutely correct, you miss any gains over that five years, you pay back the money after taxes and then are taxed again when you withdraw it.   I try to explain this time and time again to the people here but they just don't get it.

Why do people do things like this to themselves?!?! Arrrgh!!

Maybe it is some wishful thinking? The lure of "free money"?

Who knows. Never ceases to amaze me.

Audrey

 

[runchman]

When I hear people talk about this 'paying interest to themselves', I comment that why don't they pay themselves 30% interest, and make themselves rich!

And yet most still don't get it

 

[Martha]

I understand that participation in 401k plans increase if the employees know they can borrow from the plan.

Plans do not have to allow loans. We modified our plan a few years ago to limit the loan purposes. We had a big discussion as to whether that was being too paternalistic.

In the late 80s we borrowed half the money I had in a 401k. That was the maximum you could borrow. We put the money as a down payment on our first rental property. This was a big risk and probably not advisable but it seemed to work out well for us.

 

[mathjak107]

i worked the numbers and there is really no difference in taxation....lets assume an 8% interest rate and an 8% return on your 401k for simplicity..wether you take a bank loan or a 401k loan you still have to pay 8% from your after tax pocket leaving your pocket 8% poorer....if you take the bank loan your paying 8% to the bank while collecting an 8% return on your 401k...you still have to pay tax on your withdrawl on the 8% when you withdraw your 401k money at retirement...if you dont take the bank loan you pay the 401k pocket 8% which is still taxable when you withdraw it...either way its the same i think

 

[2B]

The people who do these loans are usually the same people that take regular HELOs. The asset is there and they need to consume it.

This got me thinking. I should do an expose on my BIL/SIL. They are the poster children for conspicuous consumption without regard to income.

I've already told my DW that I'd divorce her before giving them a dime.