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Old 05-25-2018, 01:57 PM   #21
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TP, what you quoted applies to someone approaching another borrower to use their 401k as collateral.... this is within the 401k plan.

While the 401k loans that I'm familiar with don't have the feature of keeping your funds invested... effectively you loan money to yourself at a reasonable rate of interest... if there is a quirk with the OP's plan that allows the money to stay invested then I think it is a no-brainer to use it.

Oh, I agree... but I have never seen a plan that allows you to stay invested... IOW, you take money out of some fund and a new asset is listed as a holding called loan to ...(cannot remember what they called it, I never got one)....


So, you are still invested, but your investment is your own loan and the income is the interest you pay...


I do not see how they can get around the rule... it does not matter where the money is coming from if it is not 'your' money... it is a loan using your 401 as collateral...


As always, I could be wrong as there might be some strange rule I have never heard of.....
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Old 05-25-2018, 01:58 PM   #22
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IMO people are too brainwashed against borrowing from a 401K.

OP has already considered the drawback of what happens if he gets separated from work, and has a plan for it.

I'm more familiar with the plan where your own 401K assets are reduced by the size of the loan. Instead of being fully invest in, say, a total bond fund, $25K will be "invested" in a loan, which you are paying back to the account at 4% interest. So the 401K is still fully invested and growing, and the rate only kind of matters. If you pay a higher rate, your 401K grows more, though note that you are funding it with after-tax money, which will be taxed again when you withdraw. If you pay a lower rate, the 401K grows less, but you pay less out of pocket.

I'm not familiar with the loan type where you assets stay fully invested, and you pay the 4% to the institution rather than to your account. That seems like it would be evaluated just like any other loan, with the risk you mentioned of repayment if you leave the company.

Those 0% credit card deals...can you get a $20K loan out of that? I'd be surprised.

Seems to me that you bought a house with a known shortcoming, the very dated kitchen, so this is an expected expense. You have money saved that could be used, but are looking at whether there's a more efficient way to pay for it, which might involve borrowing.

One thought, how much would you really pay in taxes if you sold $20-25K in funds? If you've made 20% on them, that would be 4-5K of income. 15% on that is $600-$750. One time. 4% loan interest on that would be $800-$1000. Of course the numbers change if your LTCG is greater, but don't fall into the trap of thinking the entire fund sales proceeds is taxed--it's just the gains.
+1 I think I would try a 0% credit card combined with some asset sales as a more cost effective way of financing the kitchen remodel.
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Old 05-25-2018, 02:44 PM   #23
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I would just borrow the funds from my credit union--even if it took putting up other assets as collateral.

That must be some kitchen. I bought new cabinets last year at Cabinets to Go for just over $3k for an average size kitchen for my daughter. I have a full hobby cabinet shop and can do basic cabinetry.
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Old 05-25-2018, 03:36 PM   #24
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That must be some kitchen. I bought new cabinets last year at Cabinets to Go for just over $3k for an average size kitchen for my daughter. I have a full hobby cabinet shop and can do basic cabinetry.
And for those who aren't as handy, $20-$25k for a full remodel is economical. I think we spent about double that, but went Robbie-Style. We tore out half a wall, removed a drop ceiling, all new appliances, lighting, granite, flooring, nice farmhouse sink... I balked at a $1000 faucet and settled on one for $800... and would not have come up with half of the ideas were it not for hiring a reputable design and construction company to do it for us.

Granted, our "before" kitchen...a small dark old cave. I would never have bought this house (it was already DH's). We turned it into the kind of kitchen that will make someone want to live here.
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Old 05-25-2018, 04:06 PM   #25
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My small new kitchen cost $30,000 two years ago, and that was with me being the GC and using a handyman for much of the work. I paid half in cash and half on a 0% credit card for 18 months. It was paid off in those 18 months, and was quite painless! It was a Chase Citicard.
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Old 05-25-2018, 04:42 PM   #26
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It was a Chase Citicard.
That would be a very unique card.
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Old 05-25-2018, 08:08 PM   #27
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The 0% offers I've seen are good for whatever your credit limit is. The Gotcha is the upfront fee if any. NFCU usually has 12 mo @0% around March of every year. Good to see others see value in prudent use of 401k loan provision.
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Old 05-25-2018, 08:42 PM   #28
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I would use a 0% for 18 month credit card. 0 is less than 4.1%. Just saying. 25K/18 months is $1388/month. Can you afford that? If not then pay less and transfer to another 0% card at the 17 month mark.
Most of the credit card offers I have seen now require a 3% fee for balance transfers. I used to stooze credit cards, but this requirement has eliminated that game.
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Old 05-25-2018, 10:50 PM   #29
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From what the OP described since the employer isn't removing funds from the 401K to cover the loan the employer is using money in the 401K as collateral for a loan that they are funding. Using a 401K as collateral for a loan is not allowed by IRS rules so something doesn't sound right.
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Old 05-26-2018, 12:06 AM   #30
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One thought, how much would you really pay in taxes if you sold $20-25K in funds? If you've made 20% on them, that would be 4-5K of income. 15% on that is $600-$750. One time. 4% loan interest on that would be $800-$1000. Of course the numbers change if your LTCG is greater, but don't fall into the trap of thinking the entire fund sales proceeds is taxed--it's just the gains.
That is an excellent point on how much I would actually be paying on the taxes on gains. To be honest I hadn't fully thought through that actually calculation and if the gains were small enough it still might make sense. But after looking at the funds I would be drawing from I have had them for long enough that they all have pretty much doubled.
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Old 05-26-2018, 12:25 AM   #31
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Let me just say I really appreciate all these comments. I am definitely going to look more into opening a 0% credit card for doing at least a portion of it. I could definitely use that for the appliances I'm purchasing and perhaps the countertops as they may take credit cards. I did a little digging already and liked the Chase Freedom, although it was only 15 months it also gave me $150 as a a signing bonus.

I am not surprised by all the skepticism regarding the 401k loan. I was pretty surprised by the terms of it as well. When I first found out about it from our HR director probably around 2 years ago, he confirmed that your investments stay invested if you take out a loan with no prepayment penalties. And when I talked to HR 2nd in command last week she repeated the same thing.

Now the other big decision we have going is if we want to make the cabinet boxes melamine or wood....
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Old 05-26-2018, 01:02 AM   #32
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Let me just say I really appreciate all these comments. I am definitely going to look more into opening a 0% credit card for doing at least a portion of it. I could definitely use that for the appliances I'm purchasing and perhaps the countertops as they may take credit cards. I did a little digging already and liked the Chase Freedom, although it was only 15 months it also gave me $150 as a a signing bonus.

I am not surprised by all the skepticism regarding the 401k loan. I was pretty surprised by the terms of it as well. When I first found out about it from our HR director probably around 2 years ago, he confirmed that your investments stay invested if you take out a loan with no prepayment penalties. And when I talked to HR 2nd in command last week she repeated the same thing.

Now the other big decision we have going is if we want to make the cabinet boxes melamine or wood....



What I think that some are saying is that the funds remain invested but that investment is your loan... so you have to move money to some account that is considered a loan.... which means it is not invested in stocks or whatever else you have now...


I think that is what you need to check out... and again, with the company that is holding your investments as they will know for sure...
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Old 05-26-2018, 01:37 AM   #33
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We did a massive remodel pre-ER and I highly recommend doing so while you are still working and earning income. Had we delayed until post-ER, we might have made some different decisions and not have been as happy with the end result. As it was, we could equate certain options that came up with how long it would take us to make the $$ to pay for them. It was a no-brainer to go for what we really wanted.

We financed our remodel through a combination of a HELOC at prime minus 0.26% and a few zero % accounts. We could have paid cash for all of it but chose to stay invested. In fact, we’ve kept some of the HELOC outstanding, but now that our rate is above 4%, we’re likely to pay the rest of it off this year. Staying invested and using OPM (other people’s money) at a very low cost turned out very well for us, as our portfolio increased double digits during this time.

I’ve never borrowed against a 401K or any other investment accounts but don’t understand why that would be preferable to a HELOC and/or zero percent credit.
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Old 05-26-2018, 06:11 AM   #34
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Tidbit comments ....

Several friends have SubZero refrigerators and freezers ...silly expensive and may be worth it - except they all had maintenance issues ...

It’s your money,, but $800 for a faucet is a couple of standard deviations out of the norm ....unless it is the Italian through the wall kind!

Re the remodel - no way would I borrow money to do a kitchen remodel - rebuild a house that I bought distressed, sure, but not a kitchen remodel.
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Old 05-26-2018, 06:22 AM   #35
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That is an excellent point on how much I would actually be paying on the taxes on gains. To be honest I hadn't fully thought through that actually calculation and if the gains were small enough it still might make sense. But after looking at the funds I would be drawing from I have had them for long enough that they all have pretty much doubled.
Think of it this way... if your gain is 50% because those funds have doubled and you pay 15% LTCG tax, then your net cost is 7.5% or $1,875 ($25k/2*15%). If you do the 401k loan your cost is about 4.1%/year, so if you make payments over 5 years it averages out to ~10% or $2,563 ($25k/2*4.1%*5).
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Old 05-26-2018, 06:30 AM   #36
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Let me just say I really appreciate all these comments. I am definitely going to look more into opening a 0% credit card for doing at least a portion of it. I could definitely use that for the appliances I'm purchasing and perhaps the countertops as they may take credit cards. I did a little digging already and liked the Chase Freedom, although it was only 15 months it also gave me $150 as a a signing bonus.

I am not surprised by all the skepticism regarding the 401k loan. I was pretty surprised by the terms of it as well. When I first found out about it from our HR director probably around 2 years ago, he confirmed that your investments stay invested if you take out a loan with no prepayment penalties. And when I talked to HR 2nd in command last week she repeated the same thing.

Now the other big decision we have going is if we want to make the cabinet boxes melamine or wood....
I wonder if there is a miscommunication where you are thinking that staying invested is in equities and paying the 4.1% interest and the HR folks are thinking that staying invested is the 401k loan that you earn the 4.1% that you are paying yourself. It may be useful to go through and example with them where you have $25k in the account in equities earning 8% and then take out a $25k loan to see if you are all on the same page.

On the last part, our contractor suggested going with melamine for all cabinets other than the sink base cabinet... and going with plywood for the sink base cabinet since that is the one that has the highest risk of exposure to water... plywood is nice and if the cabinets were going to be moved then I can see the upgrade perhaps being worthwhile but since they just sit there for theie whole life the upgrade didn't seem worthwhile to me. Our cabinets at our summer home are melamine and have actually been moved twice and are still very servicable.
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Old 05-26-2018, 07:42 AM   #37
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What I think that some are saying is that the funds remain invested but that investment is your loan... so you have to move money to some account that is considered a loan.... which means it is not invested in stocks or whatever else you have now...

I think that is what you need to check out... and again, with the company that is holding your investments as they will know for sure...
This is good advice.
Sometimes HR misinterprets what a financial company is saying, or has written. It may have happened once or twice, I think!
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Old 05-27-2018, 06:23 AM   #38
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Have you compared a HELOC vs 401K including the tax deduction for the HELOC? It's probably nickels and dimes either way.


I'm with others and suggest a gradual remodel for you. Or get creative and sign up with a local tech high school, Habitat for Humanity ReStore, etc. Many ways to save thousands, especially on cabinetry. My project manager side always worries about contingency costs - usually 20 to 30% more than expected. Another good reason to go slow if possible.
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Old 05-27-2018, 06:30 AM   #39
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I haven't been through a kitchen remodel myself, but do you really want it to drag on any longer than it has to?
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Old 05-27-2018, 06:34 AM   #40
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+1 The reality is that you are eventually going to spend $25k.... whether it is $10/$10/$5 or $25/$0/$0 doesn't matter...... in fact, I think the latter is preferable to living in a perpetual construction zone.
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