Taking out a loan to re-pay 401k loan?

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alter
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Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 3:43 pm

I had taken out a 50k 401k loan a few years ago to finance a house. I'm happy with the decision and house has appreciated during that time, I've gotten to live here and enjoy it this whole time, and the interest on the loan is relatively low 3.25%.

Now I'm reconsidering how long I want to stay at my current job and another concern is, should anything unexpected happen and lose the job, trying to get financing to re-pay that loan might be problematic if you go to the bank they generally ask what your income is for the loan and well, if you just lost your job, income would be far lower so thus harder to get a loan. So there would be a big peace of mind advantage in getting rid of the 401k loan.

On the other hand, the terms are nice, albeit it was amortized over 15 years, I am paying myself plus interest slowly back into the account. I do realize there is a huge opportunity cost of not having the loan balance compounding tax deferred this whole time and that is another reason why I'm considering the option of getting a personal loan to pay back the current 36k balance. Not sure what the loan rate would be but I'm guessing around 8%.

The other big concern I have with doing this is how it would affect credit rating. Right now I don't even think the 401k loan is impacting my credit rating negatively at all. If suddenly a new 36k loan balance shows up, I would think it could potentially push my score way down whereas right now I'm enjoying a good credit rating and doing lots of 0% balance transfer offers to pay down other credit card debt, and I wouldn't want to lose that benefit.

So looking for some advice on this decision and maybe anything I didn't think of. Thanks in advance!
Last edited by alter on Mon Mar 26, 2018 5:19 pm, edited 1 time in total.

JoeRetire
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Re: Taking out a loan to re-pay 401k loan?

Post by JoeRetire » Mon Mar 26, 2018 3:56 pm

Paying off a 3.25% loan with an 8% loan doesn't seem wise.

Personally, I'd try to buckle down, cut all possible expenses, and get rid of that 401k loan the old fashioned way, as quickly as possible.

Additionally, it worries me that you mention "other credit card debt"...
Last edited by JoeRetire on Mon Mar 26, 2018 3:57 pm, edited 1 time in total.

ThriftyPhD
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Re: Taking out a loan to re-pay 401k loan?

Post by ThriftyPhD » Mon Mar 26, 2018 3:57 pm

If the house has appreciated, can you refinance the mortgage? Something like a cash out refi where you put the cash out money towards your 401k loan. Requires that you have enough equity in the house relative to the mortgage balance, however.

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 4:13 pm

ThriftyPhD wrote:
Mon Mar 26, 2018 3:57 pm
If the house has appreciated, can you refinance the mortgage? Something like a cash out refi where you put the cash out money towards your 401k loan. Requires that you have enough equity in the house relative to the mortgage balance, however.
I actually just ref'ied to a 15 year fixed at 2.875% about a year and a half ago, and just got rid of PMI, so definitely not refinancing with that great low rate.

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dm200
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Re: Taking out a loan to re-pay 401k loan?

Post by dm200 » Mon Mar 26, 2018 4:18 pm

alter wrote:
Mon Mar 26, 2018 3:43 pm
I had taken out a 50k 401k loan a few years ago to finance a house. I'm happy with the decision and house has appreciated during that time, I've gotten to live here and enjoy it this whole time, and the interest on the loan is relatively low 3.25%.
Now I'm reconsidering how long I want to stay at my current job and another concern is, should anything unexpected happen and lose the job, trying to get financing to re-pay that loan might be problematic if you go to the bank they generally ask what your income is for the loan and well, if you just lost your job, income would be far lower so thus harder to get a loan. So there would be a big peace of mind advantage in getting rid of the 401k loan.
On the other hand, the terms are nice, albeit it was amortized over 15 years, I am paying myself plus interest slowly back into the account. I do realize there is a huge opportunity cost of not having the loan balance compounding tax deferred this whole time and that is another reason why I'm considering the option of getting a personal loan to pay back the current 36k balance. Not sure what the loan rate would be but I'm guessing around 8%.
The other big concern I have with doing this is how it would affect credit rating. Right now I don't even think the 401k loan is impacting my credit rating negatively at all. If suddenly a new 36k loan balance shows up, I would think it could potentially push my score way down whereas right now I'm enjoying a good credit rating and doing lots of 0% balance transfer offers to pay down other credit card debt, and I wouldn't want to lose that benefit.
So looking for some advice on this decision and maybe anything I didn't think of. Thanks for advance!
I think the 3.25% interest rate is nearly irrelevant. Yes, the house has appreciated -- BUT you completely missed out on the appreciation of equity in the 401k. A 401k "loan" is NOT a loan - that amount of the "loan" comes from selling holdings in the 401k.

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 4:22 pm

dm200 wrote:
Mon Mar 26, 2018 4:18 pm

I think the 3.25% interest rate is nearly irrelevant. Yes, the house has appreciated -- BUT you completely missed out on the appreciation of equity in the 401k. A 401k "loan" is NOT a loan - that amount of the "loan" comes from selling holdings in the 401k.

I agree, its just extra money I'm putting back into my own 401k, and also agree that I'd rather have that money invested, but as I mentioned, I'm happy with the decision and would've done it again. I only went that route because I didn't have alternate financing options whereas now I do, which makes me consider paying off the 401k loan using a regular loan.

JBTX
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Re: Taking out a loan to re-pay 401k loan?

Post by JBTX » Mon Mar 26, 2018 4:31 pm

As mentioned above the 3.25% rate is irrelevant. You are paying yourself.

The true rate is whatever the return of your 401k that you are missing by not being invested.

Having said that, I typically wouldn’t take out an 8% loan to payoff a 401k loan. But if you think you may leave the company, then maybe so.

Is a home equity loan not an option? I would think those rates would be better than 8%.

https://www.doughroller.net/personal-fi ... 401k-loan/

N10sive
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Re: Taking out a loan to re-pay 401k loan?

Post by N10sive » Mon Mar 26, 2018 4:33 pm

alter wrote:
Mon Mar 26, 2018 4:22 pm
I agree, its just extra money I'm putting back into my own 401k, and also agree that I'd rather have that money invested, but as I mentioned, I'm happy with the decision and would've done it again. I only went that route because I didn't have alternate financing options whereas now I do, which makes me consider paying off the 401k loan using a regular loan.
You'd rather pay 8% to someone than pay 3.25% to yourself? Are you contributing tax-deferred dollars to your 401k in addition to your loan?

Id just buckle down and save to pay off the 401k loan in the event you lose your job or change jobs. It sounds like you have other debt on 0% credit cards. While paying those down/continually balance transferring to other 0% cards is probably your best route unless you have a substantial amount on those credit cards.

I thinks its hard to really give advice when the whole picture isn't there. You have to get rid of the 401k if you plan to leave your job and poses a higher burden on you since if you don't pay it off and leave and cannot pay it off after penalties will be assessed. But taking an 8% loan your looking at almost 3k in interest the first year and your monthly payments may go UP depending on your terms. The chance to get 8% in the market who knows.

So it really comes down to whether or not you want to leave your job and how fast you can pay your 401k loan without having to get another loan....

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 4:44 pm

You'd rather pay 8% to someone than pay 3.25% to yourself? Are you contributing tax-deferred dollars to your 401k in addition to your loan?

Id just buckle down and save to pay off the 401k loan in the event you lose your job or change jobs. It sounds like you have other debt on 0% credit cards. While paying those down/continually balance transferring to other 0% cards is probably your best route unless you have a substantial amount on those credit cards.

[/quote]

Well, if I did what I'm considering, it would be because I'd rather stop paying myself the 3.25% interest and get the personal loan that would be used to gain back the extra 36k 401k balance, to allow that to earn the historical 7-8% that S&P500 funds have returned (which now its not doing due to the 401k loan), and then gain the additional insurance of not worrying about coming up with financing to re-pay the 401k loan if a job loss occurs, risking early withdrawal penalties and 10% fee.

edit: Yes I'm maxing the 401k contributions with pre-tax dollars right now, in addition to the loan principal and 3.25% interest I'm paying myself back into it.

delamer
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Re: Taking out a loan to re-pay 401k loan?

Post by delamer » Mon Mar 26, 2018 5:01 pm

As someone else asked, is a HELOC or fixed-rate HEL an option? If so, I’d look into one if those since it would cost you less than 8%.

Remember that in the worst case scenario where you lose your job and can’t payoff the 401(k) loan, you will not default but simply be taxed on the balance as a distribution.

Have you figured what the regular income tax plus the penalty amount would be in that case?

Does that amount give you heartburn or is it something that you could handle even being unemployed?

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 5:14 pm

delamer wrote:
Mon Mar 26, 2018 5:01 pm
As someone else asked, is a HELOC or fixed-rate HEL an option? If so, I’d look into one if those since it would cost you less than 8%.

Remember that in the worst case scenario where you lose your job and can’t payoff the 401(k) loan, you will not default but simply be taxed on the balance as a distribution.

Have you figured what the regular income tax plus the penalty amount would be in that case?

Does that amount give you heartburn or is it something that you could handle even being unemployed?
Pulling out credit from the house is probably not an option, since I just refied 15 months ago, during the refi, they did an appraisal and thats where I found out it had appreciated a bit and put me just over the 20% equity needed to get rid of PMI. So with equity still on the low side I don't think HELOC is an option, and I want to stay PMI-free.

Well I think if I lost the job, I'd be hit with my marginal rate (now 24%) on the balance and plus the 10% early withdrawal. I would have to pay the penalty most likely if I was unable to acquire financing.

Nate79
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Re: Taking out a loan to re-pay 401k loan?

Post by Nate79 » Mon Mar 26, 2018 5:26 pm

How fast can you pay it off?

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 5:31 pm

Nate79 wrote:
Mon Mar 26, 2018 5:26 pm
How fast can you pay it off?
I would probably pay it off in about 3-5 years

N10sive
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Re: Taking out a loan to re-pay 401k loan?

Post by N10sive » Mon Mar 26, 2018 5:32 pm

alter wrote:
Mon Mar 26, 2018 4:44 pm
Well, if I did what I'm considering, it would be because I'd rather stop paying myself the 3.25% interest and get the personal loan that would be used to gain back the extra 36k 401k balance, to allow that to earn the historical 7-8% that S&P500 funds have returned (which now its not doing due to the 401k loan), and then gain the additional insurance of not worrying about coming up with financing to re-pay the 401k loan if a job loss occurs, risking early withdrawal penalties and 10% fee.

edit: Yes I'm maxing the 401k contributions with pre-tax dollars right now, in addition to the loan principal and 3.25% interest I'm paying myself back into it.
Just an example using a quick calculator:
Given 35k in the market at 8% for 5 years you would gain 16k. Getting a loan for 35k at 8% your interest paid would be 7.5k.

Now if your paying yourself the 3.25% over 5 years you would make 3k. But your also getting money into the market so if we took the same payment amount and added the 4.75% to make 8% your looking at another 5k over 5 years. So that's the same as the loan and perhaps it would be more gains since the calculation isn't completely correct.

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whodidntante
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Re: Taking out a loan to re-pay 401k loan?

Post by whodidntante » Mon Mar 26, 2018 5:34 pm

No, I wouldn't take a loan to pay off a 401k loan unless I was at serious risk of paying the 10% penalty and losing the tax advantaged space permanently. Did you know that you can roll the 401k loan balance to an IRA now, and get more time to pay it off into the IRA without penalty? Do you have any taxable accounts, assets outside of a retirement plan?

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 5:47 pm

whodidntante wrote:
Mon Mar 26, 2018 5:34 pm
No, I wouldn't take a loan to pay off a 401k loan unless I was at serious risk of paying the 10% penalty and losing the tax advantaged space permanently. Did you know that you can roll the 401k loan balance to an IRA now, and get more time to pay it off into the IRA without penalty? Do you have any taxable accounts, assets outside of a retirement plan?
No I was not aware of being able to roll the 401k loan into an IRA... that is very interesting. Does the plan provider have to allow for it or can it be done universally, I wonder. I will definitely look into that. Most of my assets are retirement accounts. Thanks for this info

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StormShadow
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Re: Taking out a loan to re-pay 401k loan?

Post by StormShadow » Mon Mar 26, 2018 6:08 pm

alter wrote:
Mon Mar 26, 2018 3:43 pm
I had taken out a 50k 401k loan a few years ago to finance a house. I'm happy with the decision and house has appreciated during that time, I've gotten to live here and enjoy it this whole time, and the interest on the loan is relatively low 3.25%.
......
On the other hand, the terms are nice, albeit it was amortized over 15 years, I am paying myself plus interest slowly back into the account. I do realize there is a huge opportunity cost of not having the loan balance compounding tax deferred this whole time and that is another reason why I'm considering the option of getting a personal loan to pay back the current 36k balance. Not sure what the loan rate would be but I'm guessing around 8%.
I did the same thing for our house down payment. One thing I didn't consider was that the 401k loan is paid with post-tax money (not sure why it is structured like that). So the interest you are paying yourself, you will eventually pay income tax on it twice.

Looking back, I probably would have done the same thing. But I'm now paying down my 401k loan faster than I had initially planned (which was over 5 years).

02nz
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Re: Taking out a loan to re-pay 401k loan?

Post by 02nz » Mon Mar 26, 2018 6:20 pm

Others have pointed out the real cost of the loan is not being invested in the market. That's true, but there are ways to compensate - you can consider the outstanding balance as part of the bond portion of your overall portfolio, and adjust according (i.e., the remainder should have a higher percentage in stocks). That's what I did when I took out loans from my 401k-equivalent to finance a house, although I did also pay down the loan as quickly as possible (ended up doing so in less than two years, instead of 15).

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 6:26 pm

StormShadow wrote:
Mon Mar 26, 2018 6:08 pm
alter wrote:
Mon Mar 26, 2018 3:43 pm
I had taken out a 50k 401k loan a few years ago to finance a house. I'm happy with the decision and house has appreciated during that time, I've gotten to live here and enjoy it this whole time, and the interest on the loan is relatively low 3.25%.
......
On the other hand, the terms are nice, albeit it was amortized over 15 years, I am paying myself plus interest slowly back into the account. I do realize there is a huge opportunity cost of not having the loan balance compounding tax deferred this whole time and that is another reason why I'm considering the option of getting a personal loan to pay back the current 36k balance. Not sure what the loan rate would be but I'm guessing around 8%.
I did the same thing for our house down payment. One thing I didn't consider was that the 401k loan is paid with post-tax money (not sure why it is structured like that). So the interest you are paying yourself, you will eventually pay income tax on it twice.

Looking back, I probably would have done the same thing. But I'm now paying down my 401k loan faster than I had initially planned (which was over 5 years).
I've heard this argument before, however the benefit you gain from tax deferred compound growth on this interest will more than pay for the minor "double tax" and then some, so its really a non-issue that pays for itself.

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Re: Taking out a loan to re-pay 401k loan?

Post by N10sive » Mon Mar 26, 2018 6:27 pm

StormShadow wrote:
Mon Mar 26, 2018 6:08 pm
I did the same thing for our house down payment. One thing I didn't consider was that the 401k loan is paid with post-tax money (not sure why it is structured like that). So the interest you are paying yourself, you will eventually pay income tax on it twice.
It is structured like that because you put in with pre tax dollars. If you didn't pay with post-tax dollars you would be making out on the deal.

And regarding the income tax twice:

https://thefinancebuff.com/401k-loan-do ... -myth.html
02nz wrote:
Mon Mar 26, 2018 6:20 pm
Others have pointed out the real cost of the loan is not being invested in the market. That's true, but there are ways to compensate - you can consider the outstanding balance as part of the bond portion of your overall portfolio, and adjust according (i.e., the remainder should have a higher percentage in stocks).
As 02nz pointed out and what the article suggests above is adjust your stock percentage to more since your guaranteed a 3.25% interest on the loan your paying. Obviously there is risk involved with that so adjust according to your AA.

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badgerland
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Re: Taking out a loan to re-pay 401k loan?

Post by badgerland » Mon Mar 26, 2018 6:38 pm

This is case-in-point why people should never take loans from their retirement accounts. Cut all discretionary spending - or at least as much as possible - and pay off that puppy so it can get back to accruing proper growth

Looking4Answers
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Re: Taking out a loan to re-pay 401k loan?

Post by Looking4Answers » Mon Mar 26, 2018 6:49 pm

Just FYI, if you think you may be leaving your job and looking at different scenarios of paying off your loan, some people may not be aware that the tax bill that passed in December has lengthened the time to pay off 401k loans. Was around 60 days according to the plan details. Now a person has until tax filing deadline in the following year.

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Mon Mar 26, 2018 7:02 pm

Looking4Answers wrote:
Mon Mar 26, 2018 6:49 pm
Just FYI, if you think you may be leaving your job and looking at different scenarios of paying off your loan, some people may not be aware that the tax bill that passed in December has lengthened the time to pay off 401k loans. Was around 60 days according to the plan details. Now a person has until tax filing deadline in the following year.
I was also not aware of this..very glad to hear that. That is great news, thanks!

TravelforFun
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Re: Taking out a loan to re-pay 401k loan?

Post by TravelforFun » Mon Mar 26, 2018 7:07 pm

StormShadow wrote:
Mon Mar 26, 2018 6:08 pm
I did the same thing for our house down payment. One thing I didn't consider was that the 401k loan is paid with post-tax money (not sure why it is structured like that). So the interest you are paying yourself, you will eventually pay income tax on it twice.
I heard the 401k loan double-tax argument all the times but it's not any difference from leaving 401k money in your account and taking a loan from a bank. You would have to pay the bank loan with after-tax tax money and when you withdraw 401k money at old age, you would have to pay taxes on that too. No difference!

The other argument against taking 401k loan is that you would forgo the investment gain on the loan amount but the gain is not for sure and the loan would allow you to lock in a 3.25% safe return rate.

The only risk associated with 401k loans is job change like what you're facing now.

TravelforFun

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StormShadow
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Re: Taking out a loan to re-pay 401k loan?

Post by StormShadow » Tue Mar 27, 2018 11:31 am

TravelforFun wrote:
Mon Mar 26, 2018 7:07 pm
The other argument against taking 401k loan is that you would forgo the investment gain on the loan amount but the gain is not for sure and the loan would allow you to lock in a 3.25% safe return rate.
I don't know if I'd call it a safe return rate, because you're paying for it. Its more like a mandatory 3.25% investment.

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Ketawa
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Re: Taking out a loan to re-pay 401k loan?

Post by Ketawa » Tue Mar 27, 2018 12:42 pm

Paying 8% interest to get rid of a loan where you pay 3.25% interest to yourself makes no sense.

OP, you say the opportunity cost is actually the future earnings in your 401k, and not 3.25%. This isn't a good way to look at the problem. Let's say you take out an 8% loan to pay off the 401k loan. At this point, you are paying 8% interest while continuing to max out tax-advantaged savings. The 401k loan is gone. I don't want to speak for the entire board, but I think almost nobody would look at that situation and say it makes sense. Depending on your asset allocation, you would be borrowing at 8% to invest in fixed income earning 2-3% for a significant portion of your investments, with a hoped-for return of 7-10% on the equity portion. Don't do this.

Simply put, if this loan is seriously bothering you and you do not have the ability to max out all tax-advantaged savings while prepaying it, I think you should reduce tax-advantaged savings until it is gone. You give up the tax-advantaged space for a couple years, but this is the cost of needing a lot of money for a down payment if you are not willing to keep an outstanding loan. Your only other option to save for a down payment was reducing tax-advantaged savings in the past. There are limits to what we can save.

I am not anti-401k loans like many others on the forum. They are an effective tool for enabling people to tap tax-advantaged accounts in the event that a life situation requires a lot of funds, e.g. purchasing a home. Which is better, reduce tax-advantaged savings while accumulating savings for a down payment for a possible home purchase that might not materialize, or max them out until home purchasing plans are all ready, keeping flexibility intact? (Obviously best to do both, but few people can save over $24K per year.) I personally have taken loans from the TSP to purchase a home and to invest in 5% FDIC insured prepaid card savings accounts. I still have an outstanding loan balance of $13K that I prepay out of excess cash flow rather than save additional funds in taxable beyond the prepaid card limits, while still maxing my tax-advantaged savings.
Last edited by Ketawa on Tue Mar 27, 2018 12:51 pm, edited 1 time in total.

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Re: Taking out a loan to re-pay 401k loan?

Post by Ketawa » Tue Mar 27, 2018 12:49 pm

N10sive wrote:
Mon Mar 26, 2018 6:27 pm
StormShadow wrote:
Mon Mar 26, 2018 6:08 pm
I did the same thing for our house down payment. One thing I didn't consider was that the 401k loan is paid with post-tax money (not sure why it is structured like that). So the interest you are paying yourself, you will eventually pay income tax on it twice.
It is structured like that because you put in with pre tax dollars. If you didn't pay with post-tax dollars you would be making out on the deal.

And regarding the income tax twice:

https://thefinancebuff.com/401k-loan-do ... -myth.html
02nz wrote:
Mon Mar 26, 2018 6:20 pm
Others have pointed out the real cost of the loan is not being invested in the market. That's true, but there are ways to compensate - you can consider the outstanding balance as part of the bond portion of your overall portfolio, and adjust according (i.e., the remainder should have a higher percentage in stocks).
As 02nz pointed out and what the article suggests above is adjust your stock percentage to more since your guaranteed a 3.25% interest on the loan your paying. Obviously there is risk involved with that so adjust according to your AA.
The loan balance is not a fixed income investment. This is a common fallacy.

Let's say you have $100K in your 401k with a 50/50 allocation and take a $50K loan to invest in taxable. You didn't magically make yourself $50K richer. If you pretend that the loan balance is a fixed income investment, and maintain a 50/50 allocation in both accounts, you are really 75/25 now. Your future wealth will be similar to as if you didn't take the loan and had a 75/25 allocation and continued saving the same amount.

michaeljc70
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Re: Taking out a loan to re-pay 401k loan?

Post by michaeljc70 » Tue Mar 27, 2018 1:11 pm

You didn't give a lot of details (income/expenses). Why do you need 15 years to pay off a 401k loan? It sounds like you've already had the loan a few years.

You seem worried about not being able to get a loan without a job but what about paying all your bills without a job?

As others have said, a Heloc would be your best bet if you need to get out of the 401k loan.

alter
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Re: Taking out a loan to re-pay 401k loan?

Post by alter » Tue Mar 27, 2018 7:04 pm

Ketawa wrote:
Tue Mar 27, 2018 12:42 pm
Paying 8% interest to get rid of a loan where you pay 3.25% interest to yourself makes no sense.

OP, you say the opportunity cost is actually the future earnings in your 401k, and not 3.25%. This isn't a good way to look at the problem. Let's say you take out an 8% loan to pay off the 401k loan. At this point, you are paying 8% interest while continuing to max out tax-advantaged savings. The 401k loan is gone. I don't want to speak for the entire board, but I think almost nobody would look at that situation and say it makes sense. Depending on your asset allocation, you would be borrowing at 8% to invest in fixed income earning 2-3% for a significant portion of your investments, with a hoped-for return of 7-10% on the equity portion. Don't do this.
I don't view the 3.25% as a net gain, its just extra after tax amount I'm adding to my 401k. If I quit paying that(aka pay off the 401k loan), that 3.25% becomes extra money in my paycheck which I can invest. (for example I could even start contributing that same amount as after tax into my 401k after paying off the 401k loan if I wanted) I'm not losing anything if I stop paying it to my 401k, it just gets added to my paycheck instead. So that being a wash, I was really comparing trading the potential 8% +tax deferred compound growth the s&p historical returns for that 36k balance (I invest mostly in that in my 401k, and only a very low bond allocation) to the 8% loan rate, which I could pay off in a few short years, while the 36k balance continues to compound for another 30 years. But the advantage doesn't seem quite large enough to pull the trigger on this. I'll just prioritize paying off the 401k loan faster rather than get financing to pay it off immediately. Thanks for the replies!

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Re: Taking out a loan to re-pay 401k loan?

Post by bayview » Tue Mar 27, 2018 7:35 pm

I took a 401k (actually TSP) loan in the past, which I paid off way ahead of schedule, and we are currently using a 0% BT to knock a big chunk off our HELOC.

With that aside, I have to say that it sounds like you're maybe doing some shell-gaming with your debt, robbing Peter to pay Paul.

If I read correctly, you're moving around credit card debt on various BT offers (although at least they're 0%), and now you're contemplating paying more than twice your current interest rate to move your existing 401k loan.

Are you willing to tell us what total percentage of your CC and 401k loan debt you are paying off - and keeping off - each year? Are you seriously reducing your debt (including eating ramens in front of the TV if necessary), or are you mostly moving it around?

You said that you could pay off the 401k loan in "3-5 years." When I had my TSP loan, I knew exactly how many months it would take to pay it off; in fact, I knew how many pay periods it would take. Why don't you know how long it would take? Are you making fixed, and somewhat painful, repayments with an eye on the calendar?
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

alter
Posts: 134
Joined: Thu Feb 26, 2015 11:27 pm
Location: Chicago

Re: Taking out a loan to re-pay 401k loan?

Post by alter » Tue Mar 27, 2018 7:47 pm

bayview wrote:
Tue Mar 27, 2018 7:35 pm
I took a 401k (actually TSP) loan in the past, which I paid off way ahead of schedule, and we are currently using a 0% BT to knock a big chunk off our HELOC.

With that aside, I have to say that it sounds like you're maybe doing some shell-gaming with your debt, robbing Peter to pay Paul.

If I read correctly, you're moving around credit card debt on various BT offers (although at least they're 0%), and now you're contemplating paying more than twice your current interest rate to move your existing 401k loan.

Are you willing to tell us what total percentage of your CC and 401k loan debt you are paying off - and keeping off - each year? Are you seriously reducing your debt (including eating ramens in front of the TV if necessary), or are you mostly moving it around?

You said that you could pay off the 401k loan in "3-5 years." When I had my TSP loan, I knew exactly how many months it would take to pay it off; in fact, I knew how many pay periods it would take. Why don't you know how long it would take? Are you making fixed, and somewhat painful, repayments with an eye on the calendar?
I have credit card debt but the interest rate is very low, so I was just considering my options. I do know what month I'd pay off my 401k loan if I only let the automatic payments come out, but I hope to pay it off faster, how much faster, it depends. I just focus on paying whatever is most beneficial. Right now the credit card debt interest is low so I'll probably make additional payments to the 401k loan and forget the idea of getting a loan to pay it off.

ryman554
Posts: 1104
Joined: Sun Jan 12, 2014 9:44 pm

Re: Taking out a loan to re-pay 401k loan?

Post by ryman554 » Wed Mar 28, 2018 9:32 am

alter wrote:
Mon Mar 26, 2018 4:13 pm
ThriftyPhD wrote:
Mon Mar 26, 2018 3:57 pm
If the house has appreciated, can you refinance the mortgage? Something like a cash out refi where you put the cash out money towards your 401k loan. Requires that you have enough equity in the house relative to the mortgage balance, however.
I actually just ref'ied to a 15 year fixed at 2.875% about a year and a half ago, and just got rid of PMI, so definitely not refinancing with that great low rate.
If you did this, why in the heck did you not bundle in the 401(k) loan in with it?

ryman554
Posts: 1104
Joined: Sun Jan 12, 2014 9:44 pm

Re: Taking out a loan to re-pay 401k loan?

Post by ryman554 » Wed Mar 28, 2018 9:43 am

TravelforFun wrote:
Mon Mar 26, 2018 7:07 pm
StormShadow wrote:
Mon Mar 26, 2018 6:08 pm
I did the same thing for our house down payment. One thing I didn't consider was that the 401k loan is paid with post-tax money (not sure why it is structured like that). So the interest you are paying yourself, you will eventually pay income tax on it twice.
I heard the 401k loan double-tax argument all the times but it's not any difference from leaving 401k money in your account and taking a loan from a bank. You would have to pay the bank loan with after-tax tax money and when you withdraw 401k money at old age, you would have to pay taxes on that too. No difference!
Huh?

1. I get a bank loan at 3.5%. Bank loans me $50k, tax free. I pay it off ($51k with interest) with after tax money. Deal is done. I paid tax once on the interest of $1000.
2. I get a 401(k) loan at 3.5%, $50k, tax free. I pay if off ($51k with interest) with after tax money. I paid tax once on the interest of $1000. But, I really didn't lose the interest, i put it back into the 401(k).
2a. I immediately retire and withdraw all from the 401(k). I pay tax on the entire balance, including the $1000 I paid in "interest". So, yes, the interest gets taxed twice.

So, the two loan are *not* the same:
1. The interest in #1 is gone, money taxed once.
2. The interest in #2 is returned to me, paid for by money already taxed, but also taxed a second time.

Regardless of double taxation, #2 is in a better position.

The opportunity cost are also not the same:
1. Cash flow is reduced while you are paying the loan
2. Cash flow is reduced while you are paying the loan PLUS you are out of the market for the loan amount.

On average, #1 is in a better position, but it depends on the returns of the underlying investments. Assuming the loan is treated as "bonds", #1 is better, but only by ~ the rate of inflation.

alter
Posts: 134
Joined: Thu Feb 26, 2015 11:27 pm
Location: Chicago

Re: Taking out a loan to re-pay 401k loan?

Post by alter » Wed Mar 28, 2018 10:41 am

ryman554 wrote:
Wed Mar 28, 2018 9:43 am

Huh?

1. I get a bank loan at 3.5%. Bank loans me $50k, tax free. I pay it off ($51k with interest) with after tax money. Deal is done. I paid tax once on the interest of $1000.
2. I get a 401(k) loan at 3.5%, $50k, tax free. I pay if off ($51k with interest) with after tax money. I paid tax once on the interest of $1000. But, I really didn't lose the interest, i put it back into the 401(k).
2a. I immediately retire and withdraw all from the 401(k). I pay tax on the entire balance, including the $1000 I paid in "interest". So, yes, the interest gets taxed twice.

So, the two loan are *not* the same:
1. The interest in #1 is gone, money taxed once.
2. The interest in #2 is returned to me, paid for by money already taxed, but also taxed a second time.

Regardless of double taxation, #2 is in a better position.

The opportunity cost are also not the same:
1. Cash flow is reduced while you are paying the loan
2. Cash flow is reduced while you are paying the loan PLUS you are out of the market for the loan amount.

On average, #1 is in a better position, but it depends on the returns of the underlying investments. Assuming the loan is treated as "bonds", #1 is better, but only by ~ the rate of inflation.
The "double taxation" term really irks me because it misleads people, it makes it seem like something more is being taken vs the "single tax" in option 1, when in every case option 1 is the equivalent of it being taxed once at 100%, if something is taxed once at 100% who cares if its not taxed twice, there is nothing left to tax. Being taxed once is in this example a lot worse therefore than being taxed twice.

Also in option 2 the tax deferred compound growth generated by that interest over the long term more than covers the cost of the "2nd tax" so really it might be considered a double tax but that interest money pays for its own 2nd tax.

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