4 ms·

You're not too wrong; you can borrow against a 401(k) (<50% of the balance, no more than $50k total). Most financial advice says to stay away, though.

derekp7 13y ago
That is one thing I don't understand, is the advice to not borrow against your 401k. Lets say you have a 3-year auto loan, that is 7% interest. If you convert that to a 401k loan at 4%, that is a savings right there. Oh, but that money you borrowed isn't getting any investment returns in our 401k (I hear people say). But it is -- it is getting a 4% return (what you are paying back in interest). And considering that a well balanced fund is going to have some amount in a lower fixed-interest investment, that isn't much of a problem (just rebalance the fund when you take your loan out, then rebalance again as it gets paid off). The ONLY downside I see, is that you have to pay it back all at once if you lose your job, or face a 10% penalty (plus tax) on the loan balance.
- sokoloff 13y ago
  The money that you take out of the 401k is no longer protected against creditors. (Someone borrowing from a 401k seems more likely than the average 401k holder to be at risk for bankruptcy.) Some plans do not permit net-new contributions while a loan is outstanding. Even when plans permit it, the fact that you're borrowing on Thursday might not have you in a situation to make payroll deductions on that Friday. (This is situational, of course. If you're in dire straits overall, you might still not be making contributions.) I'd consider borrowing from a 401k to buy a house, or to pay off credit card debts that were 15% or worse and that's it, full stop. Refinancing 7% debt at 4% seems not worth it, especially if you're taking money out of equities to do it.
  - derekp7 13y ago
    Ah, I see -- it is a problem borrowing from 401k if you pay it back out of your existing contributions. Makes sense -- I've just never thought of it that way. To me, it only makes sense if you are substituting it for a regular loan, and not touching the contributions overall. In other words, if you are in a good financial situation to take out a regular loan, then a 401k loan could make sense also.

derekp7 13y ago

That is one thing I don't understand, is the advice to not borrow against your 401k. Lets say you have a 3-year auto loan, that is 7% interest. If you convert that to a 401k loan at 4%, that is a savings right there. Oh, but that money you borrowed isn't getting any investment returns in our 401k (I hear people say). But it is -- it is getting a 4% return (what you are paying back in interest). And considering that a well balanced fund is going to have some amount in a lower fixed-interest investment, that isn't much of a problem (just rebalance the fund when you take your loan out, then rebalance again as it gets paid off). The ONLY downside I see, is that you have to pay it back all at once if you lose your job, or face a 10% penalty (plus tax) on the loan balance.

sokoloff 13y ago
The money that you take out of the 401k is no longer protected against creditors. (Someone borrowing from a 401k seems more likely than the average 401k holder to be at risk for bankruptcy.) Some plans do not permit net-new contributions while a loan is outstanding. Even when plans permit it, the fact that you're borrowing on Thursday might not have you in a situation to make payroll deductions on that Friday. (This is situational, of course. If you're in dire straits overall, you might still not be making contributions.) I'd consider borrowing from a 401k to buy a house, or to pay off credit card debts that were 15% or worse and that's it, full stop. Refinancing 7% debt at 4% seems not worth it, especially if you're taking money out of equities to do it.
- derekp7 13y ago
  Ah, I see -- it is a problem borrowing from 401k if you pay it back out of your existing contributions. Makes sense -- I've just never thought of it that way. To me, it only makes sense if you are substituting it for a regular loan, and not touching the contributions overall. In other words, if you are in a good financial situation to take out a regular loan, then a 401k loan could make sense also.