401K loan

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Lakeboi
Posts: 2
Joined: Wed Sep 19, 2018 6:45 pm

401K loan

Post by Lakeboi » Wed Sep 19, 2018 7:12 pm

First post after snooping for 10 years. Wife (43) and I (42) make $350K in LCOL area. Home is paid off, both max 401K plus taxable investments each month, 529 plans for 2 kids being funded. Have $1M+ investments and little other debt. Have small emergency fund and secure corporate jobs with $100K+ RSU. We are investment rich and cash poor.

Put new kitchen, septic and roof into house this year and financed (presumably short term) with 5% HELOC from CU in March 2018. New tax rules = no interest deduction! And I hate paying interest.

Perhaps market is topped out so posing this question. Why would I not borrow from 401Ks ($40K each) and pay myself interest rather than the CU? With no HELOC deduction, it is all after tax $.

Make me sound like an idiot!

Silk McCue
Posts: 1324
Joined: Thu Feb 25, 2016 7:11 pm

Re: 401K loan

Post by Silk McCue » Wed Sep 19, 2018 7:51 pm

No need to complicate your life this way. Just pay off the HELOC in an accelerated fashion.

Cheers

N10sive
Posts: 594
Joined: Thu May 05, 2016 6:22 pm

Re: 401K loan

Post by N10sive » Wed Sep 19, 2018 7:59 pm

How much do you contribute to your taxable investments? Why not use those contributions to pay down the HELOC faster?

dsmil
Posts: 571
Joined: Tue Sep 08, 2009 10:51 am

Re: 401K loan

Post by dsmil » Wed Sep 19, 2018 8:04 pm

Sounds like a reasonable plan to me, as long as your 401k loan interest rate is comparable to what you'd get elsewhere. I like the idea of borrowing from the bond allocation of the 401k because the potential lost market gains are smaller. If borrowing from stocks, you have the possibility of missing out on some big gains. If you are paying yourself 5% on a 401k loan, and bonds return less than that, your 401k account comes out ahead and your savings are the same as if you paid the bank 5%.

Lakeboi
Posts: 2
Joined: Wed Sep 19, 2018 6:45 pm

Re: 401K loan

Post by Lakeboi » Wed Sep 19, 2018 8:09 pm

N10sive wrote:
Wed Sep 19, 2018 7:59 pm
How much do you contribute to your taxable investments? Why not use those contributions to pay down the HELOC faster?
Monthly, about 75-80% of what the HELOC 5 year repayment would be. I just realized I'm losing potential 401K growth and offsetting by not paying the CU interest.

The CU and 401K interest rate is exactly the same. YTD, my 401K investments are up 3% (Fidelity Target Retirement fund). That may be another issue/discussion question.

N10sive
Posts: 594
Joined: Thu May 05, 2016 6:22 pm

Re: 401K loan

Post by N10sive » Thu Sep 20, 2018 11:41 am

Lakeboi wrote:
Wed Sep 19, 2018 8:09 pm
Monthly, about 75-80% of what the HELOC 5 year repayment would be. I just realized I'm losing potential 401K growth and offsetting by not paying the CU interest.

The CU and 401K interest rate is exactly the same. YTD, my 401K investments are up 3% (Fidelity Target Retirement fund). That may be another issue/discussion question.
It doesn't sound unreasonable. You are losing out on gains if you took out the 401k loan which would be offset by paying the HELOC although you do not know the gains. At the 3% your investments are up, it seems you maybe allocated around 60/40 judging by your age(in the target retirement fund). And I would say its not just 3% but the compounding interest over the 5 years.

Regarding he above statement about taking from your bonds, in either a target retirement fund or funds you pick stocks/bonds the loan amount will be divided amongst all the allocation. So in other words, if you treat the 401k loan like a bond it would probably be beneifical to pick more stocks based on your allocation to adjust and not lose out on "potential" growth.

But as Silk Mccue suggested keep it simple and just pay of the HELOC at an accelerated rate.

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

Re: 401K loan

Post by ryman554 » Thu Sep 20, 2018 1:23 pm

With $350k a year, in a LCOL, O fail to see why you cannot cash flow the entire expense without needing a loan at all

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sunny_socal
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Joined: Tue Mar 24, 2015 4:22 pm

Re: 401K loan

Post by sunny_socal » Thu Sep 20, 2018 1:37 pm

Perhaps the HELOC interest will remain deductible if it was used to buy or improve your home, per this article:
https://www.marketwatch.com/story/yes-y ... 2018-04-30

From article:
Q: I took out a $500,000 first mortgage to buy my main home this year. Later, I took out a $250,000 home equity loan to pay for an addition to my main home. Can I deduct the interest on both loans?

A: Yes. You can treat both loans as acquisition debt the combined balance of which does not exceed the TCJA limit of $750,000. So you can treat the interest on both loans as deductible qualified residence interest.

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