Comments on: 5 Reasons Not to Borrow from Your 401k

By: PT

PT — Mon, 06 Jul 2009 18:11:03 +0000

@Rob – I can’t find anywhere in the IRS regs where there is a set payback period upon termination. That being said, if your company allows a longer pay back period, even after termnination, I think it’s safe to say you’ll have that long to pay it back without tax consequence.

All that being said, I think borrowing from the 401k should be your very last option, regardless of market conditions or assumptions.

By: Rob

Rob — Mon, 06 Jul 2009 17:18:06 +0000

My stock has fallen more than 50% but I am with a fairly safe company (GE). Is it a decent decision to borrow from my 401k now while the stock is low? I know if the stock starts shooting up I lose the gain right away but I really dont think that is gonna happen for atleast another 2 years. Also I talked to a company rep and he said if I did leave the company that I could still payback the loan on a monthly basis without a penalty from the IRS. Is this true? Everything I have read makes it sound like this is a Law and the company has no say in it? Any help?

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By: TStrump

TStrump — Wed, 25 Mar 2009 04:03:15 +0000

I’ve been looking at my account recently and it’s been tempting, especially since I’d like to get out of my job right now.
But, I will stay the course and not withdraw anything.

By: PT

PT — Wed, 25 Mar 2009 02:32:28 +0000

@seeabell

I definitely agree that the negative effects are lessened a bit since the market has been dropping over your borrowing period. Still, some things to think about:

1. What if you got let go from work? Something more probable these days. Would you be able to pay it back at the terms your company has set forth? Do you know those terms?

2. What if the market hadn’t dropped over the last 6 months like it had? What if it goes back up to 10,000 in the next few weeks? Your investments wouldn’t grow like they could have. Possible? Who knows? Timing the market isn’t something anyone’s been able to do successfully over 20 yrs to my knowledge. I think you just got lucky in that regard. Unless you know something I don’t.

Both reasons point to the 401k loan being a `fundamentally` poor choice in most situations. I don’t know why you pulled the money out, but if you’re like Sandy, it may have been a last ditch effort to save things. In that sense, I definitely not going to sit here and judge you for your actions. Good luck to you and thanks for sharing.

By: Sandy

Sandy — Tue, 24 Mar 2009 17:49:18 +0000

@bank

No, it doesn’t show up on your credit report but the bank will see it as a reduction in your income since they will see your pay stubs.

By: seeabell

seeabell — Tue, 24 Mar 2009 16:52:16 +0000

I know, I know, I’m a prime offender of borrowing against my 401K. But the reality right now is the money I’ve borrowed is the only piece of my 401K that isn’t dropping like a rock. In addition, the money going back as an after tax payment doesn’t bother me at all, because if I borrowed from a bank, it would have been paid back after tax as well. I get the interest. Something my 401K is not providing at the moment. If anything, I sold high and bought low. So I’m not finding this argument as convincing in the current market. I should note that I am paying back the amount, so the money will still be there in 20+ years when I retire. I’m sure I’m missing something, what is it?

By: Sandy

Sandy — Tue, 24 Mar 2009 16:17:57 +0000

Let me speak from the experience of someone who HAS borrowed from my 401K.

1. I borrowed from my 401K at 28 so I knew that I had quite a lot of time to repay the money. The loss in potential interest did not bother me too much. I also made sure that the repayment period was as short as I could afford it to be. I did not want to extend it.

2. I made the interest rate as high as the return that I had been getting on my money. Thankfully I borrowed the money right before the recent crash so I actually ended up preserving some of my money since my portfolio lost 35% last year.

3. I was in dire need on the money and had no other place to come up with the large amount of cash that I needed in such a short amount of time with an affordable interest rate. I would not recommend borrowing money to purchase a car or finance education or something like that but if it comes down to borrowing against the 401K and being out on the street then I am all for tapping that cash.

Everyone has different situations but you should be fully aware of what you are getting into. Know that you have to repay immediately if you separate from your job. Know that you have to pay both penalties and interest if you do not repay. Things like that could make you pause. Know that the loan is paid back with AFTER tax money.

I did what was right for me at the time and in 8 months or 16 payments from now I will be free of the 401K loan, freeing up a full $400 per month to smash my other debt. It also taught me how to live on $400 LESS per month while still contributing 6% of my pretax income to my 401K so I will nor return to my old ways.