401k loan vs selling taxable

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Oh123
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401k loan vs selling taxable

Post by Oh123 » Thu Jan 11, 2018 4:07 pm

We are planning to buy a house in the spring and we have saved more than enough for the downpayment, but are invested in a taxable account. We are also expecting large bonus payment from the employer in summer that is good enough to cover the down payment. Ideally, we would like to use the bonus payment for the downpayment, so that we can avoid selling and paying capital gain on taxable investments. But because of few months delay in bonus payout, we are now thinking of taking 401k loan for few months for the down payment and then paying back it with the bonus payment. Is this a good strategy? The 401k fund is with a previous employer who allows loan even after ending service with them. We haven't rolled over this fund to new employer's 401k bcz of the flexibility of this 401k fund.

bberris
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Re: 401k loan vs selling taxable

Post by bberris » Thu Jan 11, 2018 4:27 pm

Is the capital gain that significant just to raise a downpayment? You will have to pay capital gains tax eventually, unless you can wait until your income is ever low enough to have 0 % gains.

Have you thought about getting a margin or asset based loan? This might cause you to have problems qualifying, so check with your lender.

A 401k loan is not a loan; It's a withdrawal. An 11 month loan from your 401k would cause you to miss out on whatever gains or losses occur before you pay it back.

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grabiner
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Re: 401k loan vs selling taxable

Post by grabiner » Thu Jan 11, 2018 9:44 pm

bberris wrote:
Thu Jan 11, 2018 4:27 pm
A 401k loan is not a loan; It's a withdrawal. An 11 month loan from your 401k would cause you to miss out on whatever gains or losses occur before you pay it back.
However, you can eliminate this risk by taking the loan from a bond fund. (If your employer requires you to take the loan proportionally from every fund in the 401(k), you can do this, and then reallocate so that your stock balance is the same as before.)

If your 401(k) loan rate is 3%, and you take the loan from a bond fund yielding 3%, you will be putting back money into the 401(k) at the same rate that it would have grown in the bond fund. Even if the rates aren't equal, a short-term loan from a bond fund will be close to break-even.

You still need to check the plan rules. Some plans do not allow you to contribute while you are paying off a loan; this can be very costly if you lose an employer match. (THis may not be an issue for the OP, since it is an old employer's plan.) Other plans charge a fee.
Wiki David Grabiner

ERISA Stone
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Re: 401k loan vs selling taxable

Post by ERISA Stone » Thu Jan 11, 2018 10:18 pm

Allowing 401k loans to terminated participants? :shock: I'm glad you have the option but I'm having trouble fathoming a plan sponsor allowing this in a plan.

Oh123
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Re: 401k loan vs selling taxable

Post by Oh123 » Thu Jan 11, 2018 11:42 pm

Thank you all for comments. The loan is only 2-3 months and the opportunity loss is not a issue as I am staying invested with taxable fund when I take 401k loan. The loan rate is 5%, but we pay interest to our ourself and it is only for few months.

bberris
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Re: 401k loan vs selling taxable

Post by bberris » Fri Jan 12, 2018 12:25 pm

ERISA Stone wrote:
Thu Jan 11, 2018 10:18 pm
Allowing 401k loans to terminated participants? :shock: I'm glad you have the option but I'm having trouble fathoming a plan sponsor allowing this in a plan.
What's the problem? The sponsor is not at risk.

GronkSpike
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Re: 401k loan vs selling taxable

Post by GronkSpike » Fri Jan 12, 2018 12:32 pm

Piggybacking on bberris....Not only would an 11 month loan from your 401k cause you to miss out on whatever gains, but you will be taxed twice. When you repay the 401k loan, you will be repaying with after-tax money. Then many years later when you take a formal distribution, you will be taxed on those contributions and gains again.

bloom2708
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Re: 401k loan vs selling taxable

Post by bloom2708 » Fri Jan 12, 2018 12:35 pm

Wait until summer/bonus and THEN buy the house.

The waiting is the hardest part...
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

ERISA Stone
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Re: 401k loan vs selling taxable

Post by ERISA Stone » Fri Jan 12, 2018 3:12 pm

bberris wrote:
Fri Jan 12, 2018 12:25 pm
ERISA Stone wrote:
Thu Jan 11, 2018 10:18 pm
Allowing 401k loans to terminated participants? :shock: I'm glad you have the option but I'm having trouble fathoming a plan sponsor allowing this in a plan.
What's the problem? The sponsor is not at risk.
Yes, they are if they don't administer the loan properly. I don't know why an employer would risk that with a terminated employee.

ERISA Stone
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Re: 401k loan vs selling taxable

Post by ERISA Stone » Fri Jan 12, 2018 3:16 pm

GronkSpike wrote:
Fri Jan 12, 2018 12:32 pm
Piggybacking on bberris....Not only would an 11 month loan from your 401k cause you to miss out on whatever gains, but you will be taxed twice. When you repay the 401k loan, you will be repaying with after-tax money. Then many years later when you take a formal distribution, you will be taxed on those contributions and gains again.
https://thefinancebuff.com/401k-loan-do ... -myth.html

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