How do you repay back a 401k loan

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woldemariam
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How do you repay back a 401k loan

Post by woldemariam » Fri Jun 01, 2018 12:02 pm

I am considering borrowing from my 401k. What I was not sure about was how I would pay it back. This is what I see when I login to fidelity:

Image

If I proceed with this loan, will $57.60 be automatically deducted from my paycheck until the loan is paid off? And at the end of the month, if I have extra money left over, would I be able to use that money towards the loan (money I would get from a second job or money I would be able to acquire by selling stuff I don't need)?

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celia
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Re: How do you repay back a 401k loan

Post by celia » Fri Jun 01, 2018 12:14 pm

Ask your employer.

I believe it is paid back from payroll withholding. As far as making extra payments, if the employer doesn't allow that, I can see the employer's viewpoint of not wanting to handle random extra payments. That makes extra work for them and the custodian.

In your example, I can see that you would pay 7K to pay off a 6K loan, although the interest goes to your account. There is also the "cost" of the account not growing as much while some of the money is on loan.

Are you considering the loan as a way to make the account grow faster? It could backfire and in 5 years the account is worth less than if you hadn't taken a loan PLUS you would have put an extra grand into it.

N10sive
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Re: How do you repay back a 401k loan

Post by N10sive » Fri Jun 01, 2018 1:08 pm

It is typically withheld from your paycheck. Sometimes you will have to notify your payroll/HR dept to make sure they take out the payment.

You can usually make additional payments by check to the custodian. But as suggested you will need to read your loan documents and ask your employer.

chevca
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Re: How do you repay back a 401k loan

Post by chevca » Fri Jun 01, 2018 1:18 pm

Couldn't help myself.... granted, this is 2 years ago...

viewtopic.php?f=1&t=198656&p=3037162#p3037162

But OP, why are you asking about taking a $6k loan from your 401k? You can't cash flow this now?

PressIt
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Re: How do you repay back a 401k loan

Post by PressIt » Fri Jun 01, 2018 1:24 pm

Every company is different. The “standard” that I’ve seen do not allow you to make extra payments. The only time you can pay it off early is if you repay the entire outstanding balance at once. I would just pick up the phone and make a call to be sure.

You didn’t ask this, and I’m sure you’re aware, but it’s worth mentioning that generally the loan must be paid back in full if you leave employment, or you’ll be hit with a tax penalty.

Another note. Some people treat 401k loans as the worst thing you can do. While there should be other options, sometimes this makes sense. I would consider treating the outstanding loan balance as a bond portion of your portfolio... otherwise you’re altering your AA a little depending on the size of your account. Keep in mind it’s not as simple as that, as this “bond” portion has no immediate liquidity should you need to rebalance

delamer
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Re: How do you repay back a 401k loan

Post by delamer » Fri Jun 01, 2018 4:56 pm

PressIt wrote:
Fri Jun 01, 2018 1:24 pm
Every company is different. The “standard” that I’ve seen do not allow you to make extra payments. The only time you can pay it off early is if you repay the entire outstanding balance at once. I would just pick up the phone and make a call to be sure.

You didn’t ask this, and I’m sure you’re aware, but it’s worth mentioning that generally the loan must be paid back in full if you leave employment, or you’ll be hit with a tax penalty.

Another note. Some people treat 401k loans as the worst thing you can do. While there should be other options, sometimes this makes sense. I would consider treating the outstanding loan balance as a bond portion of your portfolio... otherwise you’re altering your AA a little depending on the size of your account. Keep in mind it’s not as simple as that, as this “bond” portion has no immediate liquidity should you need to rebalance
Just to clarify (since the above statement was unclear to me), you have until you file your taxes for the year in which you leave your job to repay the loan and avoid taxes/penalties. So if you leave your job in 2019, you have until you file in 2020 to repay the loan.

woldemariam
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Re: How do you repay back a 401k loan

Post by woldemariam » Sat Jun 02, 2018 7:51 am

Thanks for all the replies. Ever since I bought a house 15 months ago, I have had very little cash. I have prioritized funding my retiring accounts over building up an emergency fund. I max out my 401k, Roth and HSA. My take home pay is $4200/month and my living expenses are $2800. With the $1400 I have left over, I have been living it up, sort of. Over the past 15 month, I took a trip overseas ($4000), bought a treadmill ($1000), and new tires for the car ($700). I have been paying everything with cash and have not gotten into any debt. In the back of my mind, I knew that if I needed cash I could take out the money I was putting in my Roth.

At the one year mark, this past february, I decided to cancel my home warranty; nothing had gone wrong in the first 12 month of my home owenership. Also in february, I filed my taxes and got a nice fat return ($5400). However the very same week that I receieved the refund, my basement floods and takes out my funrance. I spent nearly all of the refund replacing the furnance and cleaning up the basement.

Starting in February, I have reigned back my spending and I have $3000 on hand. The reason that I am looking to borrow money is because my basement flooded yet again and took out my 3 month old furnace. The first time my basement flooded was because there was an extending amount power outage in my neighborhood (36 hours) and with out power, the sump pump does not work and a large amount of water entered the basement. This time around, the sump pump died. I have discovered there is a flow with the way the pump was installed. I am going to have to get some major work done to correct the issue with the sump pump; excavate a new foundation drain, install battery backed pump, etc... and get a new furnace.

So this is why I am need of cash. If I take out money from my Roth, I cannot put it back. But borrowing from my 401k allows me to put the money back. So that is why I figured the loan from the 401k was a better option. This a breakdown of my accounts:

*401k = 35,146
*Roth = 6370
*HSA = 7170

SimonJester
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Re: How do you repay back a 401k loan

Post by SimonJester » Sat Jun 02, 2018 9:47 am

woldemariam wrote:
Sat Jun 02, 2018 7:51 am
In the back of my mind, I knew that if I needed cash I could take out the money I was putting in my Roth.

So this is why I am need of cash. If I take out money from my Roth, I cannot put it back. But borrowing from my 401k allows me to put the money back. So that is why I figured the loan from the 401k was a better option. This a breakdown of my accounts:

*401k = 35,146
*Roth = 6370
*HSA = 7170
This is dangerous thinking in my mind. What if you loose your job and then have an emergency? Most plans will not allow a 401k loan if you are not an active participant. Many plans require full payment withing 60 days if leaving your employment or the loan becomes a non qualified withdraw subject to tax and 10% penalty.

You cannot barrow you way out of debt.

The best option for you is to get on a monthly written budget and stick to it. Start saving up a 6 to 12 month emergency fund.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

Sandi_k
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Re: How do you repay back a 401k loan

Post by Sandi_k » Sat Jun 02, 2018 10:59 am

Why can't you make a claim on your homeowners' insurance policy?

Nate79
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Re: How do you repay back a 401k loan

Post by Nate79 » Sat Jun 02, 2018 11:25 am

You need to stop all investments as the first step. If you want to take out some sort of loan (I would look at other options first such as personal loan at credit union) ok but understand that it needs to be paid of asap and build up a real emergency fund before any more investments. The real risk here is you try to borrow your way out of past mistakes in handling money and then if another emergency comes along in the mean time it can quickly spiral out of control. This is why I would avoid the 401k loan until ALL options have been tried.

You may even consider temporary fixes with cash until you can save up to do each fix in piece meal.

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Earl Lemongrab
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Re: How do you repay back a 401k loan

Post by Earl Lemongrab » Sat Jun 02, 2018 12:08 pm

SimonJester wrote:
Sat Jun 02, 2018 9:47 am
Many plans require full payment withing 60 days if leaving your employment or the loan becomes a non qualified withdraw subject to tax and 10% penalty.
This is out of date. See delamer's post for the correct information on the topic. You have a minimum of 8.5 months.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Earl Lemongrab
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Re: How do you repay back a 401k loan

Post by Earl Lemongrab » Sat Jun 02, 2018 12:11 pm

I wouldn't regret the home warranty. There's no way they would have paid for a furnace damaged by a flood. Maybe the sump pump that died, but no collateral damage. Mostly they try to find exceptions to pay anything.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Epsilon Delta
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Re: How do you repay back a 401k loan

Post by Epsilon Delta » Sat Jun 02, 2018 12:40 pm

woldemariam wrote:
Sat Jun 02, 2018 7:51 am
my basement floods and takes out my funrance. I spent nearly all of the refund replacing the furnance and cleaning up the basement.

Starting in February, I have reigned back my spending and I have $3000 on hand. The reason that I am looking to borrow money is because my basement flooded yet again and took out my 3 month old furnace.
If you haven't already thought about it: Don't put a furnace back in the same spot. In many case this just requires elevating it, either on a concrete pedestal (the tallest pedestal that fits, not a couple of cinder blocks) or hanging it from the ceiling. If the basement flooded head high you may need to find a different place for a furnace which may be expensive, but not as expensive as replacing a furnace a couple of times a year.

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whodidntante
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Re: How do you repay back a 401k loan

Post by whodidntante » Sat Jun 02, 2018 1:00 pm

It's repaid through payroll deduction while employed. If you separate or the terms of your employment change such that you are no longer eligible for the 401(k), then you have until October of the following year to repay it in the worst case. Other plans will allow you to continue making payments via ACH along the normal amortization schedule. If allowed, this option will be described in your summary plan description. You can also repay it via lump sum, and sometimes prepayment is allowed that is not in full. This might be through ACH, wire transfer, or a check if you're old and like checks.

Looking4Answers
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Re: How do you repay back a 401k loan

Post by Looking4Answers » Sat Jun 02, 2018 1:19 pm

DH & I recently paid off a 401k loan. Loan was originally for 5 years, paid off by payroll deductions. The plan allowed for one lump sum payment to pay down balance aside from the payroll deductions. However, before we ever considered that, the plan changed and removed that option. The only choices were by payroll deductions or by a lump sum pay-off of balance. We could not use any money in the 401k to apply toward balance directly, but we were allowed to take a distribution (which was allowed by the plan without penalty, due to plan rules and husband's age) and use that or other outside money to pay off balance. We knew husband was going to be changing jobs and just wanted to have it paid off, so we took money out of the 401k and other outside money and paid the balance. Plan rules dictated that the money withdrawn from the 401k had to have money withheld for federal income tax.

woldemariam
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Re: How do you repay back a 401k loan

Post by woldemariam » Sat Jun 02, 2018 7:59 pm

SimonJester wrote:
Sat Jun 02, 2018 9:47 am
The best option for you is to get on a monthly written budget and stick to it. Start saving up a 6 to 12 month emergency fund.
This was my plan for this year starting with the tax refund. I erred in waiting until tax season to build an emergency fund.
Sandi_k wrote:
Sat Jun 02, 2018 10:59 am
Why can't you make a claim on your homeowners' insurance policy?
The deductible on my policy is $5000.
Nate79 wrote:
Sat Jun 02, 2018 11:25 am
You need to stop all investments as the first step. If you want to take out some sort of loan (I would look at other options first such as personal loan at credit union) ok but understand that it needs to be paid of asap and build up a real emergency fund before any more investments. The real risk here is you try to borrow your way out of past mistakes in handling money and then if another emergency comes along in the mean time it can quickly spiral out of control. This is why I would avoid the 401k loan until ALL options have been tried.

You may even consider temporary fixes with cash until you can save up to do each fix in piece meal.
Plan B was to wait until I have enough cash to fix my basement. If I stop all investments, I can come up with the money in 3 months. But what terrifies me is the amount of damage water will have incurred to the basement. One thing I neglected to add is that every time it rains, water leaks in my basement. And in Maryland, it has been raining a lot. Tomorrow they are calling for 1 inch of rain. This is a separate problem from the sump pump, perhaps a crack in the foundation or soil grading.
Epsilon Delta wrote:
Sat Jun 02, 2018 12:40 pm

If you haven't already thought about it: Don't put a furnace back in the same spot. In many case this just requires elevating it, either on a concrete pedestal (the tallest pedestal that fits, not a couple of cinder blocks) or hanging it from the ceiling. If the basement flooded head high you may need to find a different place for a furnace which may be expensive, but not as expensive as replacing a furnace a couple of times a year.
Thank you for noting this out. I will have to do something about it.

SimonJester
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Re: How do you repay back a 401k loan

Post by SimonJester » Sun Jun 03, 2018 7:43 am

If I were in you shoes, I would pause the investments before I took a 401k loan. You have some money now... Fix what you can now and save up for the other repairs. Make sure you are getting multiple quotes for all your work.

I would take my time on the flooding issue to make sure you have found out the exact cause and the best fix. Mitigate the basement the best you can and make sure the sump pump is working. Perhaps go ahead with the backup unit in case of power outage. You should be able to cover that easily.

This buys you time, then get 5 or 6 quotes on fixing the flooding issues from the outside of the house...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

foo.c
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Re: How do you repay back a 401k loan

Post by foo.c » Sun Jun 03, 2018 8:33 am

I would just fix it on credit and live on rice and beans for a while until it was paid off.

A 401k loan is actually a short against your 401k and therefore your investment choices (presumably the stock market). You have a decent chance of making the wrong decision there with permanent consequences. The market could take off on a 25% run, and you will never get that return back. Or the opposite could happen. You need to be aware of that though and think long term.

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Earl Lemongrab
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Re: How do you repay back a 401k loan

Post by Earl Lemongrab » Sun Jun 03, 2018 11:10 am

foo.c wrote:
Sun Jun 03, 2018 8:33 am
I would just fix it on credit and live on rice and beans for a while until it was paid off.

A 401k loan is actually a short against your 401k and therefore your investment choices (presumably the stock market). You have a decent chance of making the wrong decision there with permanent consequences. The market could take off on a 25% run, and you will never get that return back. Or the opposite could happen. You need to be aware of that though and think long term.
Most people have some fixed-income allocation in their 401(k). Rearrange the holdings so that the loan constitutes part of that. No concerns then about the stock market.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

foo.c
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Re: How do you repay back a 401k loan

Post by foo.c » Sun Jun 03, 2018 2:08 pm

Earl Lemongrab wrote:
Sun Jun 03, 2018 11:10 am
Most people have some fixed-income allocation in their 401(k). Rearrange the holdings so that the loan constitutes part of that. No concerns then about the stock market.
I get it, but for $6000, I would just short the bank and risk nothing but my credit rating. I wouldn't even stop or reduce my current investments. Take the $1400 net after expenses every month and pay off the credit card/loan in 5 months.

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celia
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Re: How do you repay back a 401k loan

Post by celia » Mon Jun 04, 2018 1:17 pm

Earl Lemongrab wrote:
Sun Jun 03, 2018 11:10 am
Most people have some fixed-income allocation in their 401(k). Rearrange the holdings so that the loan constitutes part of that. No concerns then about the stock market.
I may be wrong, but I don't think 401Ks work like that. I think if you take a loan for 20% of the account value, for example, they remove 20% of each holding so the proportions stay the same after the money comes out. Actually, they are removing a fixed dollar amount and the percentages stay the same. As you pay it back, the percentages still stay the same.

But what you can do (but I don't recommend) is change your holdings after the money comes out. The reason you don't want to be 100% stocks is that the markets could drop significantly, then you wouldn't be able to use bonds to re-balance.

I think OP's thought process should change to not touching any retirement accounts at all, other than contributing and rebalancing while working. You shouldn't be "gambling" with your future. Life happens, as you are now experiencing, and you need to be prepared by having an emergency fund and proper insurances. After you have reached Financial Independance, your "emergency fund" can be invested as long as you can access it quickly.

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Earl Lemongrab
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Re: How do you repay back a 401k loan

Post by Earl Lemongrab » Mon Jun 04, 2018 1:37 pm

celia wrote:
Mon Jun 04, 2018 1:17 pm
Earl Lemongrab wrote:
Sun Jun 03, 2018 11:10 am
Most people have some fixed-income allocation in their 401(k). Rearrange the holdings so that the loan constitutes part of that. No concerns then about the stock market.
I may be wrong, but I don't think 401Ks work like that. I think if you take a loan for 20% of the account value, for example, they remove 20% of each holding so the proportions stay the same after the money comes out. Actually, they are removing a fixed dollar amount and the percentages stay the same. As you pay it back, the percentages still stay the same.

But what you can do (but I don't recommend) is change your holdings after the money comes out.
That's what I was getting at. If you consider the loan to be fixed income, then you might need to rebalance after it's taken out.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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