Explain to me why it's a bad idea to borrow against your 401k?

[Anonymous]

OP I have done this twice for major home purchases. It is a good idea if you are careful. You also need to be aware that the money you borrow is not reinvested until you pay it back; meaning, it will not earn more than the interest you are paying yourself on it. Which, when the market swings down, could work out in the long run Just make sure that money is back in when it swings back up!

The IRS also limits personal loans to one every 5 years. So you cannot do this again until this loan is paid back, and then you have to wait until it's been 5 years. Which is why, as a PP mentioned, it's best to limit it to true emergencies unless you have another source of backup, like the family gold mine.

[Anonymous]

Anonymous wrote:The IRS also limits personal loans to one every 5 years. So you cannot do this again until this loan is paid back, and then you have to wait until it's been 5 years. Which is why, as a PP mentioned, it's best to limit it to true emergencies unless you have another source of backup, like the family gold mine.

Are you sure about that? I know you have 5 years to pay it back but I've never heard about having to wait 5 years to withdraw again. Link please.

[Anonymous]

Anonymous wrote:You know what sounds so logical to financial gurus? Don't accumulate credit card debt. Your 401k should be held almost sacred -- to be tapped in the most dire of circumstances. Can you just try to map out a severe plan to pay off that debt (or to pay yourself back quickly if you dwindle the 401k)? 401k is meant for retirement or perhaps a true unexpected emergency. Not because you had to have the rug at Bloomies tent sale.

Just want to point out that you have absolutely no idea why OP has CC debt. Your response says a lot more about yourself than anyone else here.

[Anonymous]

Op here, thanks for all the helpful replies! And yes, you are correct, I do not have a spending problem
As my grandfather would say, "it's an accumulation of unavoidable circumstances"

[Anonymous]

Anonymous wrote:

Anonymous wrote:The IRS also limits personal loans to one every 5 years. So you cannot do this again until this loan is paid back, and then you have to wait until it's been 5 years. Which is why, as a PP mentioned, it's best to limit it to true emergencies unless you have another source of backup, like the family gold mine.

Are you sure about that? I know you have 5 years to pay it back but I've never heard about having to wait 5 years to withdraw again. Link please.

For what it's worth, my plan says: "If you had an outstanding loan or loans during the 12-month period ending the day before your new loan, you must reduce the loan limit by the highest outstanding loan balance during that period, less the outstanding balance on the day before the new loan is made, and a new loan when added to the outstanding balance of any existing loans cannot exceed this limit."

So it looks like it resets every 12 month period.

[Anonymous]

No, the IRS does not limit 401k loans to one every 5 years. Unless that is a new regulation put in place in the last 12 months.

OP, the main risk is if you lose your job. Then the sh*t hits the fan. I got laid off from my job of almost 9 years (so didn't expect to be amongst the departing) 2 years ago and had taken out a large loan from my 401k for home repairs which I had been repaying with no issue. But if you lose your job you have to pay it all back immediately or it's considered taxable income with additional penalties. In my case to the tune of a $30k federal tax liability. It's not been pretty.

[Anonymous]

My 401(k) does not allow you to contribute to it (and thus get the employer match) if you owe money. Not sure if that's the law or my employer, but in any case, that's lost money, too.

[Anonymous]

I did it, and don't regret it one bit. In fact, it was a life changing (for the better) decision. I had racked up a lot of debt, most of it unavoidable but certainly some of it idiotic. The whole time I had been dutifully contributing money I didn't really have to my 401K, in a responsible version of the way I was paying for suits I couldn't afford (but needed for work) on my credit card. In my situation, I was close to defaulting on some of the debt, because something unexpected happened that I did have to put on my CC. I was paying the minimums, but because I was late my interest rate was sky high all of the time. I finally took a loan against my 401K and paid the cards off completely. I was realistic about how much I could pay off all at once, which meant I was paying the loans back a little bit more slowly than I wanted to do, but I was also able to set up a savings account, get myself back on track with bills, etc. I used the money to really get myself out of debt and I am so glad I did. To be honest, I worried a little bit about what I would do if I lost my job, but since I was so close to default anyway, it seemed like the safer option, and I also figured that if I did lose my job they'd have to pay me unused vacation, which would have accounted for almost all of it (of course, my company had a generous leave policy). In all, it took me three years to pay myself back, but it was worth it. My company allowed up to five loans, and you could take out no more than one loan per calendar year. I actually took two separate loans out, because the first loan was a little bit under what I needed to really pay everything off (the first one just saved me from defaulting). In hindsight, I would have just borrowed everything at once, because the two different payment lines were harder to track and it was a better feeling just to pay one loan down. But that's not really a big issue. I happened to borrow when things were up and repay when things were down, so I am sure I lost out on some interest. But to be honest, I took a MUCH bigger hit during the recession than I did with my loan to myself. I'm not where I want to be with respect to retirement savings, but it's not the loan that set me back, it is the fact that I started out poor as crap and without good money management skills. I had no other option to consolidate and pay off debt, because my credit wasn't great and my payments were late constantly. So this loan, and treating it responsibly, was a HUGE turning point for me. Honestly, the only thing I wish were different is that I wish that the loan reported to credit agencies. But, that's ok. I always wondered why one would continue to save for retirement when they had mountains of credit card debt, but every single financial planner we ever heard from (associated with the company, of course) had all of these stories for why you still had to save for retirement. I honestly think it is wiser for young people to get themselves on firm financial footing, saving a little bit if they can, before they spend money they don't have on an investment. However, if you're just not saving in order to buy yourself outfits or things you don't need, then yes, priorities have to change. (BTW, OP, I have no idea why you're considering a loan - I was talking in the theoretical / general sense).

Good luck to you!

[Anonymous]

Anonymous wrote:I did it, and don't regret it one bit. In fact, it was a life changing (for the better) decision. I had racked up a lot of debt, most of it unavoidable but certainly some of it idiotic. The whole time I had been dutifully contributing money I didn't really have to my 401K, in a responsible version of the way I was paying for suits I couldn't afford (but needed for work) on my credit card. In my situation, I was close to defaulting on some of the debt, because something unexpected happened that I did have to put on my CC. I was paying the minimums, but because I was late my interest rate was sky high all of the time. I finally took a loan against my 401K and paid the cards off completely. I was realistic about how much I could pay off all at once, which meant I was paying the loans back a little bit more slowly than I wanted to do, but I was also able to set up a savings account, get myself back on track with bills, etc. I used the money to really get myself out of debt and I am so glad I did. To be honest, I worried a little bit about what I would do if I lost my job, but since I was so close to default anyway, it seemed like the safer option, and I also figured that if I did lose my job they'd have to pay me unused vacation, which would have accounted for almost all of it (of course, my company had a generous leave policy). In all, it took me three years to pay myself back, but it was worth it. My company allowed up to five loans, and you could take out no more than one loan per calendar year. I actually took two separate loans out, because the first loan was a little bit under what I needed to really pay everything off (the first one just saved me from defaulting). In hindsight, I would have just borrowed everything at once, because the two different payment lines were harder to track and it was a better feeling just to pay one loan down. But that's not really a big issue. I happened to borrow when things were up and repay when things were down, so I am sure I lost out on some interest. But to be honest, I took a MUCH bigger hit during the recession than I did with my loan to myself. I'm not where I want to be with respect to retirement savings, but it's not the loan that set me back, it is the fact that I started out poor as crap and without good money management skills. I had no other option to consolidate and pay off debt, because my credit wasn't great and my payments were late constantly. So this loan, and treating it responsibly, was a HUGE turning point for me. Honestly, the only thing I wish were different is that I wish that the loan reported to credit agencies. But, that's ok. I always wondered why one would continue to save for retirement when they had mountains of credit card debt, but every single financial planner we ever heard from (associated with the company, of course) had all of these stories for why you still had to save for retirement. I honestly think it is wiser for young people to get themselves on firm financial footing, saving a little bit if they can, before they spend money they don't have on an investment. However, if you're just not saving in order to buy yourself outfits or things you don't need, then yes, priorities have to change. (BTW, OP, I have no idea why you're considering a loan - I was talking in the theoretical / general sense).

Good luck to you!

Best post ever.

[Anonymous]

Anonymous wrote:

Best post ever.

I know! I just wish it were longer.

[Anonymous]

They should not make be you pay a penalty or tax you if you use 401k for emergencies or buying a house, the penalty rule is idiotic

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Best post ever.

I know! I just wish it were longer.

I just spit out my coffee. Well done.

Seriously, the L O N G pp makes some very good points - boiled down, they are: It can be a good idea if you (i) understand the risks (chiefly what happens if you lose your job); (ii) understand the costs (not getting investment gains on the borrowed $$, potentially being unable to contribute to the 401k while a loan is outstanding - that has current tax as well as retirement consequences); and (iii) most importantly, understanding that this is a last resort, not a frequently used strategy to pay off avoidable consumer debt.

[Anonymous]

OP, you have to do the math. With what you are paying on the credit cards, vs. the growth you could expect in your 401k, which scenario leaves you in a better or worse situation?

[Anonymous]

I am 62 already and still work full time. Why is it a bad idea to borrow from my 401K to put a new roof on my house that insurance will not cover and I can't afford myself?

[Anonymous]

Another thing to consider, your original 401(k) contribution goes in pre-tax but any loan repayments are made after tax and then taxed again when you take the money out at retirement. So essentially that pot of money that constitutes the loan is taxed twice. That coupled with the fact that you are earning nothing while that money is not invested should make 401(k) loans a last resort.