Borrowing from 401(k)?

[WesF]

Sounds like you are AGREEING that a 401k loan would be better than a personal loan or carry credit card debt...

Yes I think it's better but if you read some of the advice given, some people are saying its a bad idea to take a 401(k) loan and suggesting a personal loan. Hence the statement , "I am going to disagree with some of the advice given"

 

[capysolo]

I'm going to disagree with some of the advice and say that a 401(k) loan is better than carrying a balance on a card or a personal loan for the following reasons.

1). There is no tax penalty as long as you continue to make your payments and pay it back.

2) You are paying yourself back with interest. The interest does not go to a bank.

3) you don't actually sell stock. You are just not earning on that money until you pay it back. This is why you pay yourself back with interest.

4) stock market is in good shape right now. You would not be "selling low" so the chances are you won't be missing out on alot of potential earnings for a few years.

5). If the stock market drops while you are paying back your loan you actually protected your money from a loss.

Misread the first line... oops! :tongue:

 

[kuyatwo]

I'm going to disagree with some of the advice and say that a 401(k) loan is better than carrying a balance on a card or a personal loan for the following reasons.

1). There is no tax penalty as long as you continue to make your payments and pay it back.

2) You are paying yourself back with interest. The interest does not go to a bank.

3) you don't actually sell stock. You are just not earning on that money until you pay it back. This is why you pay yourself back with interest.

4) stock market is in good shape right now. You would not be "selling low" so the chances are you won't be missing out on alot of potential earnings for a few years.

5). If the stock market drops while you are paying back your loan you actually protected your money from a loss.

1. Yes there are no tax penalties but most 401k there are fees for processing the loans and selling the shares

2. You are paying your self in interest but you lose out on chance to improve your 401k portfolio. (A) if you been in it for over 5 years you bought funds at there hi so getting a loan and selling shares when they are low you are losing your investment

3. Say for example the 401k loan payment payroll deduction is $200 instead taking a loan just take $200 from your pay check and put it towards CC payment

4. The big thing is if you get laid off you whatever the 401k loan balance is you have to pay it off in I think 30 days

$2500 is not a lot especially when you consider you are gonna get a payroll deduction already AFTER TAX to pay off the loan just use that money and pay down the CC talk to any financial advisor they will tell you to never take a loan off your 401k to pay off a $2500 CC


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[WesF]

1. Yes there are no tax penalties but most 401k there are fees for processing the loans and selling the shares

2. You are paying your self in interest but you lose out on chance to improve your 401k portfolio. (A) if you been in it for over 5 years you bought funds at there hi so getting a loan and selling shares when they are low you are losing your investment

3. Say for example the 401k loan payment payroll deduction is $200 instead taking a loan just take $200 from your pay check and put it towards CC payment

4. The big thing is if you get laid off you whatever the 401k loan balance is you have to pay it off in I think 30 days

$2500 is not a lot especially when you consider you are gonna get a payroll deduction already AFTER TAX to pay off the loan just use that money and pay down the CC talk to any financial advisor they will tell you to never take a loan off your 401k to pay off a $2500 CC


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1) Processing fees are less than $100 usually.

2) stock market is strong right now. Dow Jones closed above 13,000 Friday. You are not selling low. The interest you pay yourself back is usually higher than your rate of capital gain. You will waste much more money paying a high credit card interest rate plus fees.

3) paying $200 a month for a 401(k) loan will pay down the principle MUCH faster than paying a credit card balance with higher interest rate plus financing fees, etc.

4) if you lose your job with a 401(k) loan and you cannot afford to pay the loan back you just have to pay income tax on the money you took out of the 401(k).

If you lose your job with large credit card debt and can't pay it back you damage your credit with the possibility of bankruptcy.

Any financial adviser will tell you to NEVER carry a balance on a credit card.

 

[financialreef]

I am a Financial Advisor (16 years now), there has been some good advice given.

A couple of options I would consider after you have cut up your credit card:

1. Stop any contribution over your company match and take whatever that percentage is and pay it directly on your CC debt.

2. Call the CC company and ask them to lower your interest rate (don't take no or I can't for an answer).

3. Take a good look at your budget and trim as much fat from it as you can. Call all of the bills that you have and see if there is a lower rate available. Take and savings each month and pay on the CC balance.

4. If you decide to take a loan from your 401k, then only take out the portion of your 401k that you have allocated to fixed income (bonds) and use the loan as that fixed amount (you're guaranteeing a return of whatever interest rate you are paying back as opposed to the ridiculously low interest you are currently earning). Then, once you've paid off that loan, do it again if you still owe on the CC.

5. Look around the house and eBay/Craigslist stuff laying around your house that you had to have that you now have to step over when you go in the garage.

Don't do anything you are not comfortable doing.

 

[kuyatwo]

You are wrong on interest making up the investment. This year every month I have averaged 10% on my 401k so for him. Some month I even hit close to 20%

So for example

$2500 dollars in 401k 10% growth for nov would $250 dollars

New dec balance $2750 10% growth Dec $275

New jan balance $3025 10% growth $302 dollars

His investment is compounding








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[capysolo]

You are wrong on interest making up the investment. This year every month I have averaged 10% on my 401k so for him. Some month I even hit close to 20%

So for example

$2500 dollars in 401k 10% growth for nov would $250 dollars

New dec balance $2750 10% growth Dec $275

New jan balance $3025 10% growth $302 dollars

His investment is compounding








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I never said it made up for it. I said that it would help offset it, not a ton. Read it again!

Plus, how your 401k performs is not necessarily how his or anyone else's performs.

We can go back and forth for the rest of time, everyone putting in their 2 cents, and saying everyone else with a differing opinion is wrong... But, i think he has gotten plenty of good advice and options to make his decision.

 

[clowns101]

You are still pretty young, If I were you, I would borrow against the 401k an not look back. You have plenty of time to build up your balance in your 401k that I dont see it being a problem.

I have a VERY high credit score, and built it all off one loan, I think you will be fine, just be smart with it. Having money dosent come from making $30 a hour, it comes from manipulation of your money...

 

[Pappy]

It is safe to assume to say ABSOLUTELY NOT. I questioned this myself at one point and the way my $$$ is structured my financial advisor told me no way no how and never. I would suggest speaking to a qualified professional with regards to such matters. Kinda like asking someone whose 18 for marriage advise;)