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A friend dipped into his 401k recently. The way it worked is that instead of taking money from the 401k directly, they issued him a loan for the amount he wante
by caseysoftware 6y ago
A friend dipped into his 401k recently. The way it worked is that instead of taking money from the 401k directly, they issued him a loan for the amount he wanted with the 401k as collateral. They framed it as less tax liability for him but I'd wager the bigger reason was to prevent stock sell offs.
If that's happening at scale, then those 401k accounts are getting massive liabilities stacked up against them.. which falls apart if their value goes down.
- catblast 6y ago401k backed loans are nothing new. The incentive is the avoidance of tax penalties (or less obtusely that's the disincentive at the federal level to just withdrawing). It's not to prevent stock sell-offs, it's to prevent people for whimsically withdrawing from their 401k/retirement account.. Nothing stops your friend from selling everything and leaving it as cash or some non-stock instrument in the account.
- dmitriy_ko 6y agoWhen you take out 401K loan, the plan sells equivalent amount of shares and gives you the cash. So it's still causing market sell off. As you pay it back the shares are bought again.
- greenyoda 6y agoA mutual fund doesn't own specific shares of stocks on behalf of an individual - it's just one big pool of assets, and the individuals own shares of that pool, not the underlying securities. So if there's still lots of cash coming in every month from new payroll deductions, there might be no need for the fund to sell stocks to pay out a loan. They'd just buy fewer stocks that month. They'd only have to sell stocks if the total cash going out (loans, plus distributions to retirees) exceeded the total cash coming in (payroll deductions).