Comments on: Should You Borrow From Your 401K?

By: Jim

Jim — Sat, 24 Oct 2009 12:49:36 +0000

I think it’s always good to try to get a lower interest rate.

By: Debbie

Debbie — Sat, 24 Oct 2009 00:08:19 +0000

I have a $10K loan @ 10% interest from my 401K; should I repay now via home equity LOC at lower interest rate?

By: Trixy

Trixy — Wed, 30 Sep 2009 13:41:22 +0000

Borrowing from your 401K isn’t the best option, and while most, if not all financial guru’s will tell you not to do it, there are some advantages. We looked at every option we have, like taking out a home equity loan, but as with most in today’s economy, we owe over $100k more than it is worth. No equity in our home.

Long term borrowing (more than 1 year to pay back) is not advisable. However, if you can repay it in less than 12 months, it is something to consider. With the amount of interest we are paying on our credit cards, and over the long run, we actually can benefit by taking out a loan against our 401K. Yes, there are other con’s that we looked at very carefully, but we decided this was our best option in the long run.

Unfortunately, on one of our CC’s, we are being charged 30% interest. I couldn’t figure out why that card was never going down when I was paying double the minimum amount if not more. Since I do everything electronically, I never looked at my statement so I started going through them and noticed the interest rate was 30%. I called last week to find out why it was so high and to try and get it reduced. Back in April I was 1 day late (they received my electronic payment the day after my due date). The CC company considers that dilenquent and up goes the interest rate for 6 months. Well, that wouldn’t be so bad, but I was 1 day late again in September so now I have another 6 months with 30% interest. I tried to get it reduced, but even tho I have been a card holder since 1992, credit in the 800’s, and was only 1 day late 2 times in the last 12 months, I am considered a “credit risk” and they will not reduce my interest rate. I was furious to say the least, but more pissed at myself for not getting my payment in one day earlier. And on top of that, I got hit with a late fee.

I know borrowing isn’t the best option, but we have weighed all the pro’s and con’s and decided to go for it. Plus, if the economy was different and we were making a good return on our 401K’s, we probably would not be doing this. Since our 401K isn’t growing like it did in previous years, we aren’t losing that much in returns especially if we can repay within 12 months and put all that money back in there for when the economy turns back around. The loss right now is less than the interest we would be paying on our credit cards.

By: Marsi H.

Marsi H. — Fri, 25 Sep 2009 15:56:23 +0000

I am considering to take out a loan on my 401k of $30K to pay off debt at 10.24%. Previously my interest rate was 3.99, but I was late on a payment and the bank in anticipation of the new laws has increased my rate (per our agreement to a higher interest rate currently 10.24%). I called and asked them to lower the rate, yet they have declined my request. They said they only raised it partially and usually they raise it to 21% or higher for defaults.

I recently purchased a home from my parents way below market value, but all the banks tell me I cannot refinance my home to get access to the ~$100K equity for 12 months because the lower of the purchase price and the appraised value is used to calculate the refinance amount. Therefore, I have to wait a year. I’d rather not pay 10.24% interest on $30K for a year. So what are my options since I don’t have those funds in a liquid account?

Recently I’ve been thinking that I could either take out a 401k loan to pay off my debt or take out a lower interest rate personal loan to pay off my debt. With either option I would simply pay the loan monthly until I can refinance next year and pay off my debt completely. I have no belief that my job is in jeopardy. However, if I were to lose my job, I would just take out a personal loan to repay the debt to my 401k (another option). The reason I’m leaning to the 401k loan over the 401k is that either way I’m paying interest. Why not pay less interest and pay it to myself, especially since I’ve never attained the returns that everyone on this page seems to suggest that I’ll miss out on if I take my money out of the account for a year? Anyone have any answers/suggestions?

By: Howard77

Howard77 — Fri, 13 Mar 2009 15:58:39 +0000

If you take money out of your 401K/403B to make a downpayment and purchase the house in the same year do you have to pay taxes on those funds at the end of the year? If not, how do you write that down on your taxes? Thanks!

By: jman

jman — Fri, 06 Feb 2009 20:33:20 +0000

you actually have to take into consideration the return you would have made on that $5000 you borrowed. you could break even or maybe even lose money on the deal.

By: Biffton Ulysses Yuppie

Biffton Ulysses Yuppie — Fri, 02 Jan 2009 17:17:54 +0000

Borrow from 401K?
100% of my 401k is in government bonds and I am the only one in my company who has not seen a loss in the past few years. The biggest looser lost over 50% of their portfolio.

If I borrow $5,000.00 at 5% and pay off 18% credit cards, I have a net gain on 13% over time. Or is my math wrong?
BUY

By: LaMoor

LaMoor — Wed, 31 Dec 2008 14:10:31 +0000

Because I believe there is going to be a total meltdown in the US borrowing from 401 K and reducing the income you put in it is a good idea. If you are required to pay it back keep the money you borrowed and pay back the interest before tax time. I agree with Ron if Wall Street keeps stealing the money why do we keep putting it in the market. I believe it is a temptation to weak people who see our funds as easy prey to satisfy their addiction and the worst part of this they are not required to pay it back nor does anyone go to jail.

By: barba44057

barba44057 — Thu, 28 Aug 2008 16:01:31 +0000

Can your employer charge you a garnishment fee every pay period to process your 401K loan?

By: Dennis

Dennis — Sun, 30 Mar 2008 21:32:52 +0000

Generally, I agree that borrowing money from your retirement fund is not a good thing. However, situations come up, and it happens…I did it once many years ago to make a down payment on a home. The main thing is that you’re losing out on the growth potential of the monies you took out. Yeah, well, consider this. What if you happened to time it just right and you took money out while the market was high, and suddenly during your payback period the market (and share values in your 401K) tanks (like now!)). This would be a good time to pour as much money as you can as fast as you can back into paying back that loan (when the share prices are lower then when you took the money out). I was contributing 12% (on top of my employer’s 5%) into my 401K before the loan. During the loan payback period, I adjusted my contribution to 5% (the max my employer matches), and then allocated the difference (7%) towards repayment of the loan. I have done similar things in the past with the cash value buildup on life insurance. That is, take out the cash value that has accumulated (and do whatever I want with it), then restructure my quarterly premiums such that $1 goes towards premium to keep the policy in force, and the remainder goes towards payback of the loan. Hoping and assuming the market will recover and the share prices in my 401K recover as well, by that time hopefully I will have paid off the loan and in so doing purchased A LOT of shares at a lot lower price. Just one other way to look at it.

By: Eric

Eric — Fri, 29 Feb 2008 04:57:27 +0000

I have a unique situation where it seems to be totally favorable to take a 401(k) loan:
My company is relocating me. As a result, I am selling my home and buying a new home. This would be cut-and-dry if I would sell my house first, and then buy a new home. Complicating matters is that I have 2 young children and keeping my home in show condition is something I would prefer not to do.
Now, I plan on buying a new home and moving into it and putting my house on the market at the same time. My company will give me an interest-free advance of about 50% of the equity I have in my home. They will also pay my mortgage while I have two payments and promise to buy my home after 120 days.
In this case, I need about $20,000 cash to keep my LTV below 80% on my new home. The maximum time period I will need this loan is 120 days. I will not quit my job, and getting fired is highly unlikely (my company would not relocate me if that were the case). I will repay the loan once my first home sells and I capture the equity.
The $20K can come from either a bridge loan or my 401(k). My 401(k) charges $25 and about $3 per month in fees. My worst-case scenario on fees is $37. A bridge loan, on the other hand, is several hundred dollars in closing costs plus a healthy interest rate that goes to the bank. With the 401(k) loan, I recapture the interest during retirement.
If the stock market takes a sudden up-turn during the 120 days that I have the loan, then I lose out on growth. With the market as it stands now, I would argue that I have at least an equal chance of the market tanking. If the market is lower when I re-pay my loan, then I have actually made money in the process (sell high and buy low).

There it is, a pretty unique situation where a 401(k) loan is the way to go. I don’t think that using a 401(k) loan is a good idea in general, for two reasons. First, you are taking money out of the market and missing out on compounding interest. Second, it is a risky long-term loan since the government will take a healthy bite if you lose your job and cannot repay the loan pronto. If you feel you must take a loan to pay off credit cards, then get a home equity loan (or just quit goofing around and pay the darn things off-putting credit cards on a 15-year amortization is a good way to stay poor forever).

Also, I will add a note: The “non-deductability” of repayment is a non-factor. If I was taxed on the deduction, then it would be tax-disadvantaged. A 401(k) loan is tax neutral. I could take $10,000 out of my 401(k) as a loan today, pay it back tomorrow, and there is no additional tax bill. A bridge loan could be tax-advantaged, but I would have to pay interest/fees to a bank before I can get a portion of that back in taxes.

By: G

Sun, 03 Feb 2008 18:37:10 +0000

Question: I borrowed from my 401 K to pay off credit card debt and purchase furniture for my new apt. It was around 5,000. The APR is at 10%, it seems that I my finance charge is only 286.00 and I have 26 payments of 200.00 bi-monthly payments to pay it off. I think thats a pretty good deal, would anyone disagree?

please respond.

By: Panks

Panks — Sun, 06 Jan 2008 03:24:51 +0000

I agree with Robert 100 %, actually my research of a probable recession in 2008 lead me to this articile and if the recession indeed comes and market takes a nosedive , I think loaning from 401K and investing in recession proof equities/markets would definitely be a lot better choice.

By: Robert

Robert — Sat, 10 Nov 2007 13:58:02 +0000

Just one thing. I have always thought that borrowing from the 401k was a good idea. Depending on the circumstances. I borrowed 3k in ‘99 just in case of a computer meltdown, so I would have cash on hand. Welll, as we all know that market took a dive in ‘00-’01, but I was paying myself back @ 8% while the market was taking up to 30% off my 401k investments. So I was buying back in at reduced prices, since the market was going down. I don’t think it would be a good idea to try & time the markets that way, but it worked out for me, since I was able to pay it all back in two years, at a reduced price on shares. This part about not making as much on your pay back as you would get from the investments does not work in a recession.

I would do it again, in a down market. Maybe 2008?

By: ron blan

ron blan — Sat, 10 Nov 2007 04:10:15 +0000

What if for some reason the company went bankrupt and robbed your 401k money like we read about in the papers. Say you had a pretty good nest egg and borrowed from the 401k to pay off the loans on your property. Would a person be better off in that situatuion than to have the loans through a bank or some other financial institution. The way I look at it, if the money was stolen from your 401k savings, you at least would have your homeplace paid for. What could they do, make you pay it back so they can steal more?