Should we pay back our 401k loan early?

[Anonymous]

We took out a $50,000 15-year 401k loan to buy our house nearly four years ago and have about $40,000 remaining on it. We are in the midst of selling off a rental property and will be getting about that much out of the sale. Wondering if we should repay the loan or invest the money some other way, since we are paying the 4.25% interest to ourselves on the 401k loan. Anyone thought through the pros and cons of this? We have no other debts, other than our mortgage.

[Anonymous]

You don't have one of the 401(k) loans where you're barred from contributing until you repay, do you? If so, I would certainly repay it.

If not, it is a pretty close call in my view, but I think given that its your retirement money and that I don't think its a stellar year to be in the market anyway, I would probably repay some or all of it.

[Anonymous]

Thanks, PP. Good perspective. No, it's not one of those loans. We are maxing out contributions to the 401k while paying about $85 each week post-tax to repay the loan. There is no penalty for early payoff.

[Anonymous]

I would definitely pay it off while you can, because if you lose your job you would be forced to pay it off within a very short amount of time.

[Anonymous]

Anonymous wrote:You don't have one of the 401(k) loans where you're barred from contributing until you repay, do you? If so, I would certainly repay it.

If not, it is a pretty close call in my view, but I think given that its your retirement money and that I don't think its a stellar year to be in the market anyway, I would probably repay some or all of it.

if it's like our 401(k), you can't pay the loan down in part. Either you pay it all off at once or stay on the payment plan.

[Anonymous]

Anonymous wrote:

Anonymous wrote:You don't have one of the 401(k) loans where you're barred from contributing until you repay, do you? If so, I would certainly repay it.

If not, it is a pretty close call in my view, but I think given that its your retirement money and that I don't think its a stellar year to be in the market anyway, I would probably repay some or all of it.

if it's like our 401(k), you can't pay the loan down in part. Either you pay it all off at once or stay on the payment plan.

OP here -- yes, that's how ours is as well.

[Anonymous]

I would pay it off so that if a good opportunity comes along you have the flexibility to change jobs. If you leave the job with the 401k you will be required to pay off any loans on the 401k at that time. You don't want to feel stuck in your job because you can't pay off the loan.

You may be very happy in your job, but you never know when an interesting opportunity will pop up.

[Anonymous]

Anonymous wrote:We took out a $50,000 15-year 401k loan to buy our house nearly four years ago and have about $40,000 remaining on it. We are in the midst of selling off a rental property and will be getting about that much out of the sale. Wondering if we should repay the loan or invest the money some other way, since we are paying the 4.25% interest to ourselves on the 401k loan. Anyone thought through the pros and cons of this? We have no other debts, other than our mortgage.

Just wanted to point out that in repaying the loan, it is basically the same thing as investing it - just within your 401K. When you put the money back in there, it starts earning for you again, instead of you paying yourself the interest. So either way if you invest the money or pay off the loan - you are getting market gains. But if you pay off the 401K loan, you are then free to change jobs as needed without risk of defaulting and paying a penalty.

[Anonymous]

It is literally your 401k money? I thought the 401k money was collateral. Otherwise you'd think the interest rate would be better. And why doesn't it incur the penalty if it's spent?

[Anonymous]

Anonymous wrote:It is literally your 401k money? I thought the 401k money was collateral. Otherwise you'd think the interest rate would be better. And why doesn't it incur the penalty if it's spent?

You need to educate yourself about 401k loans!

[Anonymous]

If not, it is a pretty close call in my view, but I think given that its your retirement money and that I don't think its a stellar year to be in the market anyway, I would probably repay some or all of it.

Just wanted to point out that in repaying the loan, it is basically the same thing as investing it - just within your 401K. When you put the money back in there, it starts earning for you again, instead of you paying yourself the interest. So either way if you invest the money or pay off the loan - you are getting market gains. But if you pay off the 401K loan, you are then free to change jobs as needed without risk of defaulting and paying a penalty.

I was going to point this out too--if it's not a stellar year to be in the market, i.e., you don't expect market returns >4.25%, or at least you want some of your 401(k) egg earning a steady return in cash rather than exposed to market risk, that's a reason not to pay off the loan. The effect is to keep that 40,000 in cash, earning 4.25% (from you). You the home mortgage borrower are breaking about even--4.25% is the going rate these days on a 30 year loan, and since the loan was for a home purchase you get the mortgage deduction--while you the 401(k) investor are getting a steady guaranteed 4.25%, which is better than you can do in bonds or T-bills these days.

Meanwhile, that 40,000 you're realizing from the sale of investment property? Plow it back into some other investment property. Rental property is a safe and productive investment, steadier than the market right now IMHO. (And even if you don't share MHO, it's good diversification.)

[Anonymous]

Pay it back OP!!

You can always borrow it again if needed but you just never know what might happen in the future with that job - forcing you to repay the loan.

also the very good points made by PP regarding your retirement income NOT growing because you're actually just paying yourself back - in tiny amounts as you go along.

.... I think you probably knew all along you should do this but were hoping we would say something totally different.

[Anonymous]

Anonymous wrote:I would definitely pay it off while you can, because if you lose your job you would be forced to pay it off within a very short amount of time.

If you lose your job, you would have even bigger problem, delinquent mortgage.

[Anonymous]

I'm not paying my TSP loan off early. But interest rate is much lower and I can make partial extra payments. If I were in your situation I might do it for fear of frittering away the money on home improvements or the like.

[Anonymous]

OP here. Thanks for all your comments. Some very good perspective here. I actually would like to pay off the loan, since I don't like having debt hanging out there. But I want to think it through and be smart about it. This is good food for thought.