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

By: mlehman

mlehman — Thu, 01 Jan 1970 00:00:00 +0000

I have a great opportunity to purchase a house at half price with the help of HUDs good neighbor next door program. The house is 80000 and I’d get it for 40000. I owe 8000 that must be paid off before even being prequalified. I have two retirement account from two different school districts. One of them I can’t contribute to anymore, but I get the interest (about 1000 per year). The other one I’ve borrowed from this year to pay off a debt. Wouldn’t it be a good idea to take the money out of the first one, pay off the debt from the second one and pay off that 8000 so I couled buy a half price home? I’d already be saving 40000 on home and the amount I have in the first account is only 25000. I would love any advice from people who know about this stuff.

By: Philip Taylor

Philip Taylor — Thu, 01 Jan 1970 00:00:00 +0000

The stock market will not return 0% over the long term. If you borrow, you will lose out on any market gains while that money is out of the account. The stock market is a long-term play, and your money needs to stay invested to receive the full benefit of the market, taking advantage of every up and down.

By: Staci

Staci — Thu, 01 Jan 1970 00:00:00 +0000

Yesterday I had the oportunity to reivew my husband’s quarterly 401K statement and I realized that the entire time he has owned his 401K his return on investment has been right at 0%.
So I had an idea.
If he borrows $10,000 from his 401K he will be paying it back with interest, which to my understanding will be added to the balance of the 401K account. If we deposit that money into our rewards checking account which has a 3.52% APR, won’t we come out ahead?
It seems like 3.52% is better than 0%.
And if he looses his job and has to pay the money back immediatley, we’ll just take it out of the rewards checking account and pay it back.

By: Philip Taylor

Philip Taylor — Thu, 01 Jan 1970 00:00:00 +0000

Rod, I like the sound of your strategy IF you are going to do the 401K loan. That's a smart way to do it. Little loans lessen your risk. They also delay the payoff though.However, I don't think you should do the 401K loan.My experience is that in most cases like this, you can pull up your boot straps and crush this debt with your own efforts (i.e. selling things, extra jobs like pizza delivery, etc.). We're capable of great things when we put our entire energy and focus into it. I would encourage you to go after this debt with an intensity like never before.If you've been able to avoid debt over the past 6 years, then it would seem that you can make changes and pay down the debt fairly quickly.That said, I am in favor of reducing your interest rate while you are in the process of paying down the debt. I used 0% balance transfer credit card to achieve this. I've seen others do the same through peer lending.

By: Rod

Rod — Thu, 01 Jan 1970 00:00:00 +0000

I have a considerable amount of credit card debt (amassed over the years from various unfortunate events; no new debt in the last 6 years!) and am on the edge of looking into bankruptcy relief. However, I have a substantial 401k account. I have been with my employer for several years and feel my job is fairly stable. I’m considering taking out small loans and repaying them back in short periods of time and applying the loans towards paying off my unsecured debt. The low interest (paid to me) and the scheduled repayment makes it a very enticing option. I’m 35 and feel I still have time to make up the loss in retirement money. Can you comment on my situation? I’d appreciate your opinion.

By: PT

PT — Thu, 01 Jan 1970 00:00:00 +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 — Thu, 01 Jan 1970 00:00:00 +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?

By: TStrump

TStrump — Thu, 01 Jan 1970 00:00:00 +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 — Thu, 01 Jan 1970 00:00:00 +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 — Thu, 01 Jan 1970 00:00:00 +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.