Join Early Retirement Today
Reply
 
Thread Tools Display Modes
new slant on pay off mortgage question
Old 03-04-2012, 05:18 PM   #1
Recycles dryer sheets
nphx's Avatar
 
Join Date: May 2007
Posts: 345
new slant on pay off mortgage question

I am currently building a new home and have been paying cash as I go. I received some advice to take a loan from my 401k and pay myself back at about 6%. Apparently this is a legal rate (max rate) and strategy – any one have experience?
nphx is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-04-2012, 05:32 PM   #2
Dryer sheet wannabe
 
Join Date: Dec 2011
Posts: 18
We did this for our kitchen remodel. It was the right decision for us, but there are some caveats...
* Your loan payments include the interest you pay yourself, but unless you repurchase your shares at the same exact rate (which is almost impossible) your actual rate will vary. If the funds go up in price, you'll be earning less or losing money on the deal.
* If your employment is terminated by you or your employer, you must pay it back in full or any outstanding loan balance will be classified as a withdrawal and you'll be subject to income tax and penalties.
* Some plans allow for prepayment of the balance, and some do not. We wouldn't have done it if we couldn't pay it back as soon as construction was completed.
* In our plan some funds were excluded, so even if your plan allows loans you might currently be invested in funds that don't allow loans.
jennypenny is offline   Reply With Quote
Old 03-04-2012, 05:39 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Aug 2004
Location: Laurel, MD
Posts: 8,309
In my opinion, 401k loans are not loans at all. Your plan will sell assets to produce the funds for the "loan".

If you can designate the loan proceeds come from the fixed income portion of your 401k, it locks your cost of funds. Even if your plan does not let you designate which funds to sell, you can achieve same results by rebalancing. If your plan sells stocks that go up in value while you are paying back the loan, the "lost opportunity" adds cost to your loan. This could work in your favor if the stocks go down in value.

The interest rate is really meaningless except it does help make up for the time those funds are out of the plan.

I don't t
__________________
...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
jazz4cash is offline   Reply With Quote
Old 03-04-2012, 08:20 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 17,205
Quote:
Originally Posted by nphx View Post
I am currently building a new home and have been paying cash as I go. I received some advice to take a loan from my 401k and pay myself back at about 6%. Apparently this is a legal rate (max rate) and strategy – any one have experience?
The interest rate is set by the plan administrator... there is no maximum... however, it is supposed to be market

Quote:
Originally Posted by jennypenny View Post
We did this for our kitchen remodel. It was the right decision for us, but there are some caveats...
* Your loan payments include the interest you pay yourself, but unless you repurchase your shares at the same exact rate (which is almost impossible) your actual rate will vary. If the funds go up in price, you'll be earning less or losing money on the deal.
* If your employment is terminated by you or your employer, you must pay it back in full or any outstanding loan balance will be classified as a withdrawal and you'll be subject to income tax and penalties.
* Some plans allow for prepayment of the balance, and some do not. We wouldn't have done it if we couldn't pay it back as soon as construction was completed.
* In our plan some funds were excluded, so even if your plan allows loans you might currently be invested in funds that don't allow loans.

Not all plans require you to pay off a loan if you leave employment.... it is an option that the company chooses when setting up the plan... the plan that my company set up only requires that you pay it by the end of the year you leave...
Texas Proud is offline   Reply With Quote
Old 03-05-2012, 07:13 AM   #5
Recycles dryer sheets
nphx's Avatar
 
Join Date: May 2007
Posts: 345
Thanks - our 401k adminstration is done privately but is in a fidelity account. It seems like if i had a 6% guaranteed investment i would do it so it seems to be a good decision.
nphx is offline   Reply With Quote
These 401K loans can be Extremely Expensive Money
Old 03-05-2012, 10:04 AM   #6
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,391
These 401K loans can be Extremely Expensive Money

Besides foregoing the growth of the loan assets, the fees, and possible other "hidden" penalties...

Check out this article:

7 Reasons Why Borrowing From Your 401k is Bad, Bad, Bad!

Quote:
4 – You pay double taxes
While the loan itself isn’t taxed, remember you are paying the loan from payroll taxed dollars. Down the road when you pull out of your 401k, you will again have to pay taxes on that as well, so essentially any money you pay against the loan is really double taxed.
MasterBlaster is offline   Reply With Quote
Old 03-05-2012, 12:07 PM   #7
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,433
Just to clarify, this double taxation only applies to the interest paid on the loan (which is not tax deductible). Clearly, there's no double taxation of the principal.
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Old 03-05-2012, 12:16 PM   #8
Recycles dryer sheets
 
Join Date: Apr 2010
Posts: 273
What loans can you repay with pre-tax dollars?
Sesq is offline   Reply With Quote
Old 03-06-2012, 02:45 PM   #9
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,854
Quote:
Originally Posted by nphx View Post
I am currently building a new home and have been paying cash as I go. I received some advice to take a loan from my 401k and pay myself back at about 6%. Apparently this is a legal rate (max rate) and strategy – any one have experience?
Yes. There are at least two downsides.

1) if you leave the company, you must pay the loan back immediately...OUCH.

2) There is an opportunity cost of not having the money in the account. If you do it and the market crashes, you look like a genius. If you do it and the market surges, you look like a dufus.

Good luck!
__________________
"Live every day as if it were your last, and one day you'll be right" - unknown
Finance Dave is offline   Reply With Quote
Reply

Tags
401k pay off mortgage


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
What are your hobbies on FIRE? Birchwood Life after FIRE 51 04-09-2012 11:09 PM
Bengen on his "4% rule" Onward FIRE and Money 40 03-07-2012 07:29 AM
Hi From New York Apes68 Hi, I am... 1 03-04-2012 11:15 AM
Electronics Repair Question LauAnn Other topics 12 03-04-2012 10:28 AM
Dumb tax question about receiving long-term care insurance benefits Nords Life after FIRE 12 03-03-2012 12:43 PM

» Quick Links

 
All times are GMT -6. The time now is 08:27 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.