Loans from 401k -- back door investing?

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ilovedogs
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Loans from 401k -- back door investing?

Post by ilovedogs » Tue Mar 10, 2015 12:53 pm

I apologize if I'm missing something, but as I was looking into taking a small loan from my solo 401k (and moving it to Etrade because Vanguard does not allow loans), I realized I did not care about having to pay it back with interest because the money goes right into my account. From what I learned, all of that interest is paid by me to me. Correct?

Well, say, what if I took out a loan from my solo 401k with a five year payback period and just invested the money somewhere else for five years, and paid back the loan with other money. Wouldn't I end up with more in my account plus the other investment?

I must be missing something.

P.S. The possible loan is to have funds available for buying a house, but might not need.

terran
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Re: Loans from 401k -- back door investing?

Post by terran » Tue Mar 10, 2015 1:02 pm

I suppose if you set an interest higher than the return you end up getting on your investments you would end up with more money inside the 401k than you would have otherwise had and less outside the 401k than you would have otherwise had, so it might be a backdoor way of getting a bit more into your retirement accounts. You'd have to figure in the effect of taxes on the taxable account you invest the money in though.

ERISA Stone
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Re: Loans from 401k -- back door investing?

Post by ERISA Stone » Tue Mar 10, 2015 1:20 pm

Some people believe you are double taxed. This article explains that you aren't double taxed, but the interest repayments aren't tax deductible. IMO, if you were going to borrow the $$ for something anyway, it might be a good idea to borrow from yourself, rather than a bank. However, I wouldn't pull the funds out just for the sake of having them outside of the retirement accounts.

http://thefinancebuff.com/401k-loan-dou ... -myth.html

Also, as an FYI, if your loan policy allows it, you can take a loan from your 401k for 30 years, if it is used for the purchase of a primary residence. But it has to be for the use, not just the intent to purchase.

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hand
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Re: Loans from 401k -- back door investing?

Post by hand » Tue Mar 10, 2015 2:01 pm

You may be missing at least three things:

1) The amount invested outside the 401(k) isn't guaranteed to return in excess of the interest you are paying back to your 401 - you may end up with $0 or less than $0 outside the 401(k)

2) In most cases there is a penalty if you are unable to pay back your 401(k) loan

3) There are overhead costs (both dollars and time) to manage the proposed borrow + invest + repay

I personally think a 401(k) loan makes sense in some situations as an alternative to standard loans, but is pretty risky for most folks.

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ogd
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Re: Loans from 401k -- back door investing?

Post by ogd » Tue Mar 10, 2015 2:10 pm

ilovedogs wrote: Well, say, what if I took out a loan from my solo 401k with a five year payback period and just invested the money somewhere else for five years, and paid back the loan with other money. Wouldn't I end up with more in my account plus the other investment?

I must be missing something.
Yes. You are paying the interest with after-tax money, but you're not getting a deduction on either end. This makes it a bad deal, and you're better off investing in an after-tax 401k, which itself isn't a very good deal but at least you'll pay taxes only on profits when withdrawing.

The interest is, in effect, double-taxed: once when you earned the money, then again when you withdraw. The principal isn't, as explained above by ERISA Stone and tfb. But the interest is not a good way of contributing.

Mind you, I'd still recommend contributing more to the 401k and relying on the possibility of a loan to cover needs like a downpayment in most circumstances; after all the double taxation of interest isn't that big of a deal compared to the chance of much greater 401k tax savings.

livesoft
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Re: Loans from 401k -- back door investing?

Post by livesoft » Tue Mar 10, 2015 2:21 pm

I had my spouse take out the maximum loan from her 401(k) in order to invest elsewhere. I described this at the time it was done. Several benefits were acrued that are slightly different than the way the OP presented it:

1. The 401(k) plan was bad with expense ratios around 2%, so the $50,000 loan avoided the 2% hit.
2. The 401(k) was invested in a bond fund (it had the lowest expense ratio), the loan was invested in a bond fund as well, so minimal difference in risk and possible gains.
3. The loan was not only invested in a bond fund, but that bond fund had a much lower expense ratio and was in a 529 plan, so that the gains from investing the loan were tax-free. That is, no double-taxation of the gains.
4. The interest rate charged was higher than the yield of the bond fund, so the effect was similar to making slightly larger 401(k) contributions.

Not a benefit, but the loan was "called" early when my spouse's company was sold. We simply paid off the loan from taxable investments. She found out that others in her company also had 401(k) loans, but were unable to pay them off when they had to, so they ended up with the 10% penalty and non-qualified withdrawal thing. Nevertheless, being called early was a blessing in that the entire 401(k) was rolled over to an IRA and invested in low-expense-ratio Vanguard ETFs.
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ERISA Stone
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Re: Loans from 401k -- back door investing?

Post by ERISA Stone » Tue Mar 10, 2015 2:28 pm

livesoft wrote:I had my spouse take out the maximum loan from her 401(k) in order to invest elsewhere. I described this at the time it was done. Several benefits were acrued that are slightly different than the way the OP presented it:

1. The 401(k) plan was bad with expense ratios around 2%, so the $50,000 loan avoided the 2% hit.
2. The 401(k) was invested in a bond fund (it had the lowest expense ratio), the loan was invested in a bond fund as well, so minimal difference in risk and possible gains.
3. The loan was not only invested in a bond fund, but that bond fund had a much lower expense ratio and was in a 529 plan, so that the gains from investing the loan were tax-free. That is, no double-taxation of the gains.
4. The interest rate charged was higher than the yield of the bond fund, so the effect was similar to making slightly larger 401(k) contributions.

Not a benefit, but the loan was "called" early when my spouse's company was sold. We simply paid off the loan from taxable investments. She found out that others in her company also had 401(k) loans, but were unable to pay them off when they had to, so they ended up with the 10% penalty and non-qualified withdrawal thing. Nevertheless, being called early was a blessing in that the entire 401(k) was rolled over to an IRA and invested in low-expense-ratio Vanguard ETFs.
I get nervous any time I am on the opposite of an issue with you, but I have to ask, how did she avoid the 2% ER hit? She still had to pay the loan back and then the funds would be reinvested back into the plan. Also in your story, you basically provided a really good reason why 401k's can be bad even though it worked out for your family, correct?

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Re: Loans from 401k -- back door investing?

Post by livesoft » Tue Mar 10, 2015 2:38 pm

ERISA Stone wrote:I get nervous any time I am on the opposite of an issue with you, but I have to ask, how did she avoid the 2% ER hit? She still had to pay the loan back and then the funds would be reinvested back into the plan. Also in your story, you basically provided a really good reason why 401k's can be bad even though it worked out for your family, correct?
The 2% was the bond fund expense ratio, so with the fund value smaller by $50,000, that $50,000 did not get exposed to the fund's expense ratio. So she did not avoid the 2% hit forever. One could say the 2% hit was avoided on the outstanding loan principal.

If one takes out a 401(k) loan, then one should have assets to pay it off right away if needed. I suppose that if we did not have money in a taxable account that we could have withdrawn the money from the 529 plans where the $50,000 was invested and paid a small penalty on the gains in order to pay off the loan. As it was, the loan payments ran a couple of years, so when the loan was called, the remaining principal was no longer $50K.

I'll add another possible benefit here: If the money had been invested in a taxable account in equities and those equities dropped in value, then they could have been tax-loss harvested for that benefit, PLUS the [future] value of the 401(k) would be preserved since it would not drop by the same amount.
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ilovedogs
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Re: Loans from 401k -- back door investing?

Post by ilovedogs » Wed Mar 11, 2015 2:58 pm

livesoft, you said this in #4 above: "The interest rate charged was higher than the yield of the bond fund, so the effect was similar to making slightly larger 401(k) contributions."

This is the the background for my post. The loan is from a bond fund, and I know the loan can be paid back, and I might -- and might not -- do better with my purpose for it.

Here's more background:

1. My money is tied up in investments with huge capital gains from '09 and in I-Bonds I want to keep and in a money market account or bank accounts where I want to keep it and in bond funds in retirement accounts.

2. I don't feel the same way about keeping my bond funds in the solo 401k, and do not mind being wrong.

3. A loan from myself paid back to myself is a nice way to boost my 401k since I know I can pay it back anyway.

4. I am self employed with irregular income, so this type of loan is great. It's hard to qualify for others. I don't have to verify anything to take a loan from me.

Right now I expect there will be two more times when I do this, paying it back and then another loan.

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Re: Loans from 401k -- back door investing?

Post by livesoft » Wed Mar 11, 2015 3:02 pm

If you take a loan, take the maximum since the fees will be a lower percentage of loaned amount. That is, don't bother with a small loan.
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ilovedogs
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Re: Loans from 401k -- back door investing?

Post by ilovedogs » Wed Mar 11, 2015 3:05 pm

livesoft wrote:If you take a loan, take the maximum since the fees will be a lower percentage of loaned amount. That is, don't bother with a small loan.
I agree. Thanks for the reminder.

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ilovedogs
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Re: Loans from 401k -- back door investing?

Post by ilovedogs » Wed Mar 11, 2015 3:17 pm

P.S. Etrade told me there are no fees or costs to do this other than the interest I pay back into my own account. My 401k is currently with Vanguard, but I am moving it so I can do this. (Vanguard does not allow loans.) I am a moderately conservative person and this struck me as the right way to go in my situation. The only cost is paid to me. I win.

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Re: Loans from 401k -- back door investing?

Post by centrifuge41 » Sat Apr 13, 2019 1:14 pm

Bumping an old thread...

Let's assume you will definitely be at the same employer for the next 5 years, and you have the liquidity to invest in a 401k and also in taxable.
Let's also assume that when you take out a loan, you can continue to do your normal 401k contributions, and those are still matched.

If the 401k interest rate is high, isn't that a good thing? Can you use the high interest rate to shift more assets into your 401k beyond the 19k annual cap?

For my 401k, for instance, initiating a 60 month 401k loan costs only $114. True, it's billed as an establishment fee + a quarterly maintenance fee, but it is small enough that we can assume it is all up front.

A 50k loan at 7.5% interest leads to a total amount paid into the account of $60,030. So, over the course of 5 years, you can get an extra 10k ($10,030) into the account vs. not taking a 401k loan. You do have to subtract out the fact that the asset growth is now being done via a side taxable investment rather than within a 401k though.

Thoughts?

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Re: Loans from 401k -- back door investing?

Post by ogd » Sun Apr 14, 2019 12:46 pm

centrifuge41 wrote:
Sat Apr 13, 2019 1:14 pm
A 50k loan at 7.5% interest leads to a total amount paid into the account of $60,030. So, over the course of 5 years, you can get an extra 10k ($10,030) into the account vs. not taking a 401k loan. You do have to subtract out the fact that the asset growth is now being done via a side taxable investment rather than within a 401k though.

Thoughts?
See my message above -- this is a bad deal. The extra 10k is paid with post tax money, so if you have a 25% tax rate, it cost you 13,373 of pre-tax money to add $10k to your 401k. However, it will be treated as pre-tax money at withdrawal and taxed again. You are better off investing in an after-tax 401k, or sticking to the normal channel where 10k pre-tax money translates to 10k 401k money.

The utility of the 401k loan is solely to allow you some peace of mind -- to contribute more to the 401k than you would otherwise be comfortable with wrt potential future needs, knowing that you can take out a 401k loan if those needs (like a large house downpayment) end up materializing. Hopefully repaying the loan quickly, as the "interest you pay yourself" includes a 25% haircut from the bad tax treatment.

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Re: Loans from 401k -- back door investing?

Post by texasdiver » Sun Apr 14, 2019 8:44 pm

I did a 401(k) loan....(actually a TSP loan) to generate a large enough down payment to buy my first house. The house appreciated by about 50% over the next 5 years so it worked out to my benefit vs waiting another year or two to generate the down payment by savings.

One caution about 401(k) loans. If you, for any reason, leave your job, the balance of the 401(k) loan may come due. So investing it in something non-liquid may generate problems if your employment isn't 100% secure.

However I don't buy the notion that it is any kind of free money, unless as in livesoft's case, you are doing it to avoiding extortionist fees within the 401(k) plan. You are paying yourself interest with your own money so no new dollars are generated. It's money you already have, all you are doing it reclassifying it from a taxable account to a 401(k) that you will owe taxes again on some day. So the interest you are paying yourself will be double-taxed.

What it is is a possible alternative to other types of loans such as a HELOC or taking out a parent student loan or some other such.

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Re: Loans from 401k -- back door investing?

Post by Earl Lemongrab » Tue Apr 16, 2019 2:17 pm

texasdiver wrote:
Sun Apr 14, 2019 8:44 pm
One caution about 401(k) loans. If you, for any reason, leave your job, the balance of the 401(k) loan may come due. So investing it in something non-liquid may generate problems if your employment isn't 100% secure.
The new tax laws brought in a change to that. You have up until tax day with extensions of the year in which you separate from service. So that's a minimum of slightly over 10 months, up to well over a year.
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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Re: Loans from 401k -- back door investing?

Post by jdilla1107 » Wed Apr 17, 2019 12:52 pm

ogd wrote:
Sun Apr 14, 2019 12:46 pm
The extra 10k is paid with post tax money, so if you have a 25% tax rate, it cost you 13,373 of pre-tax money to add $10k to your 401k. However, it will be treated as pre-tax money at withdrawal and taxed again. You are better off investing in an after-tax 401k, or sticking to the normal channel where 10k pre-tax money translates to 10k 401k money.
This is wrong. Explained here:

https://thefinancebuff.com/401k-loan-do ... -myth.html

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 1:25 pm

jdilla1107 wrote:
Wed Apr 17, 2019 12:52 pm
ogd wrote:
Sun Apr 14, 2019 12:46 pm
The extra 10k is paid with post tax money, so if you have a 25% tax rate, it cost you 13,373 of pre-tax money to add $10k to your 401k. However, it will be treated as pre-tax money at withdrawal and taxed again. You are better off investing in an after-tax 401k, or sticking to the normal channel where 10k pre-tax money translates to 10k 401k money.
This is wrong. Explained here:

https://thefinancebuff.com/401k-loan-do ... -myth.html
This is not wrong.

From the context of considering a 401k loan vs another consumer loan, TFB's article may be correct, depending on how you frame the issue. Someone is paying tax somewhere and the loan interest isn't tax deductible.

From the context of considering whether to take out a 401k loan to pay yourself interest in order to expand tax-advantaged space, the loan interest is double taxed in the sense that if you are taking the loan from a Traditional 401k, paying loan interest is like making making non-deductible contributions to a Traditional IRA that will be taxed as ordinary income upon withdrawal. If the loan is from a 401k that is 100% Roth 401k, it is in fact a backdoor way to create extra Roth space in your 401k if the interest rate is high enough.

Just consider if you could set a 100% loan interest rate for your 401k. You could borrow $50K and pay back $100K in one year. Would it make sense to do this?

If 100% Traditional 401k, then the loan interest would be double taxed because it's like making contributions to a non-deductible Traditional IRA. It's not a great deal because non-deductible Traditional IRA contributions are not a great deal compared to a taxable account.

If 100% Roth 401k, this would be an incredible way to increase your Roth account size.

If you think that the loan interest isn't taxed, then please make the case why borrowing $50K from a Traditional 401k to pay back $100K in one year could be a good idea.

Obviously, 100% is an extreme example, but it shows that the interest is taxed if the loan was from a Traditional 401k, and that applies no matter what interest rate is set.

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Ketawa
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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 1:25 pm

There was a long thread a while ago about the proper way to compare 401k loans vs consumer loans (or investing in taxable). Here is the way to decide, edited from another post I made.
Ketawa wrote:
Wed May 20, 2015 11:19 pm
I believe this is the definitive post on calculating whether a 401k loan to either invest in taxable or prepay debt in taxable (functionally the same thing): http://www.bogleheads.org/forum/viewtop ... 8#p1589509. So much so that I spent a long time studying it and adapting it into a spreadsheet I could use as a decision tool.

Rtax = return in taxable account. Can be the return from prepaying another loan (mortgage, auto, student, etc), or the return on a fixed income investment. Use tax-adjusted value, e.g. reduce rate on mortgage if you itemize, or reduce return of fixed income by your marginal tax rate.

Rtsp = return in TSP/401k. For me, G Fund interest rate. For others, expected return on a safe fixed income investment in the 401k.

L = TSP/401k loan rate.

T = Tax on TSP/401k distributions. Estimate of marginal tax rate in retirement. Take into account Roth vs Traditional split for your loan, i.e. loans typically disburse from a 401k in the same Roth/Traditional proportion as the account's split, and are repaid in the same proportion. For example, if your estimated marginal tax in retirement is 25% and your 401k was 100% Roth, T = 0%. If 100% Traditional, T = 25%. T is a linear combination of 0% and 25% for anything between those values.

Then compare two values.
Rtax - Rtsp * (1 - T)
L * T

If (Rtax - Rtsp * (1 - T)) > (L * T), then take funds from the TSP/401k and invest in taxable/prepay debt. Equivalently, don't prepay TSP/401k loan.
If (L * T) > (Rtax - Rtsp * (1 - T)), then do not take a TSP loan. Equivalently, prepay TSP loan before investing in taxable or prepaying debt.

Hope this helps.
Last edited by Ketawa on Wed Apr 17, 2019 1:38 pm, edited 1 time in total.

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Re: Loans from 401k -- back door investing?

Post by dm200 » Wed Apr 17, 2019 1:26 pm

ilovedogs wrote:
Tue Mar 10, 2015 12:53 pm
I apologize if I'm missing something, but as I was looking into taking a small loan from my solo 401k (and moving it to Etrade because Vanguard does not allow loans), I realized I did not care about having to pay it back with interest because the money goes right into my account. From what I learned, all of that interest is paid by me to me. Correct?
Well, say, what if I took out a loan from my solo 401k with a five year payback period and just invested the money somewhere else for five years, and paid back the loan with other money. Wouldn't I end up with more in my account plus the other investment?
I must be missing something.
P.S. The possible loan is to have funds available for buying a house, but might not need.
When you take out the 401k "loan" - 100% of the funds you receive come from the 401k liquidating your investments.

Makes zero sense to do this.

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 1:42 pm

dm200 wrote:
Wed Apr 17, 2019 1:26 pm
ilovedogs wrote:
Tue Mar 10, 2015 12:53 pm
I apologize if I'm missing something, but as I was looking into taking a small loan from my solo 401k (and moving it to Etrade because Vanguard does not allow loans), I realized I did not care about having to pay it back with interest because the money goes right into my account. From what I learned, all of that interest is paid by me to me. Correct?
Well, say, what if I took out a loan from my solo 401k with a five year payback period and just invested the money somewhere else for five years, and paid back the loan with other money. Wouldn't I end up with more in my account plus the other investment?
I must be missing something.
P.S. The possible loan is to have funds available for buying a house, but might not need.
When you take out the 401k "loan" - 100% of the funds you receive come from the 401k liquidating your investments.

Makes zero sense to do this.
There's nothing special about keeping investments in a 401k vs investing in taxable, if the math works out. This is an old thread and I think the OP probably made a mistake because the math probably didn't make sense to do this for a speculative home purchase.

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Re: Loans from 401k -- back door investing?

Post by jdilla1107 » Wed Apr 17, 2019 1:52 pm

Ketawa wrote:
Wed Apr 17, 2019 1:25 pm
If you think that the loan interest isn't taxed, then please make the case why borrowing $50K from a Traditional 401k to pay back $100K in one year could be a good idea.
It's exactly like a non-deductible IRA contribution which is sometimes a good idea and sometimes not. It is a good idea if you are in a high tax bracket now, want to defer taxes on tax inefficient income, and will be in a low tax bracket later. (eg: tax arbitrage)

However, I was responding to what I considered to be a comment about double taxation on 401ks loans, which does not exist. (However, after re-reading ogd's comment, I'm not even sure about the point being made.)

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ogd
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Re: Loans from 401k -- back door investing?

Post by ogd » Wed Apr 17, 2019 2:11 pm

jdilla1107 wrote:
Wed Apr 17, 2019 12:52 pm
ogd wrote:
Sun Apr 14, 2019 12:46 pm
The extra 10k is paid with post tax money, so if you have a 25% tax rate, it cost you 13,373 of pre-tax money to add $10k to your 401k. However, it will be treated as pre-tax money at withdrawal and taxed again. You are better off investing in an after-tax 401k, or sticking to the normal channel where 10k pre-tax money translates to 10k 401k money.
This is wrong. Explained here:

https://thefinancebuff.com/401k-loan-do ... -myth.html
It's right. TFB (and Suze Orman, wrongly) are talking about the principal of the loan, the $50k in the post I quoted. That I completely agree with TFB, it's not double-taxed.

I am talking about the $10k interest in the post I quoted. The poster wasn't interested in the utility of the principal, just making an extra $10k contribution. The $10k is double taxed, since it goes from post tax to pre tax money 1:1, without having previously made the opposite transition like the $50k principal.

So you can make a $10k contribution, it just costs you an awful lot, much more than the normal route, and even the usually-not-maxed-out After Tax 401k is almost certainly better (haven't thought through all of the scenarios though). Hope this clears things.

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Re: Loans from 401k -- back door investing?

Post by LongRoad » Wed Apr 17, 2019 2:27 pm

There is no "double taxation" of any part of a 401k loan or repayment.

A 401k loan can be decomposed into 2 transactions, one from the point of view of the 401k account, and another from the point of view of the borrower. The loan is exactly equal to the sum of two transactions:

The borrower receives post-tax money and repays the 401k account with post-tax principal and interest, exactly the same as on a car loan. No double taxation occurs here.

The 401k account is making a loan, the same as buying a bond. Interest is repaid into the account by the borrower, exactly the same as a corporate bond paying interest to the account. No double-taxation occurs here either.

Upon withdrawl, the money repaid as interest is taxed. But so is every dollar ever earned (along with contributions) within the account. It makes zero difference whether the money was interest repaid from a 401k loan, interest paid on bonds held in the account, or capital gains from stocks. The money from your loan repayment isn't magically "double-taxed" while stock gains are only "single-taxed". No double-taxation here either.

Of course, the dollar amount subject to taxation upon withdrawl is greater (hopefully!) than the total dollar amount contributed. But this isn't double-taxation. It's the definition of tax-deferred vs. tax-free gains, and that gain (along with the contribution amount) is always taxed once -- when withdrawn from a Trad 401k.

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Re: Loans from 401k -- back door investing?

Post by ogd » Wed Apr 17, 2019 2:43 pm

LongRoad wrote:
Wed Apr 17, 2019 2:27 pm
The borrower receives post-tax money and repays the 401k account with post-tax principal and interest, exactly the same as on a car loan. No double taxation occurs here.
Yes, there is double taxation of the interest.

Please read the thread bumping post again: viewtopic.php?f=10&t=160714#p4492155 . The poster isn't actually interested in the loan, if anything the principal will be a burden as they're gonna invest it in taxable. They only care about adding an extra $10k to the taxable account.

The argument for double taxation is actually much simpler than the argument you're thinking of (about the principal): that 10k contribution in a 25% bracket costs them $13.3k of pre-tax money, yet it will only generate 7.5k plus gains at withdrawal if bracket the same. Compare to a 13.3k pre-tax contribution the old-fashioned way, which generates 10k plus gains at withdrawal. Clearly the poster's $13.3k is double taxed.
Last edited by ogd on Wed Apr 17, 2019 2:44 pm, edited 1 time in total.

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 2:44 pm

jdilla1107 wrote:
Wed Apr 17, 2019 1:52 pm
Ketawa wrote:
Wed Apr 17, 2019 1:25 pm
If you think that the loan interest isn't taxed, then please make the case why borrowing $50K from a Traditional 401k to pay back $100K in one year could be a good idea.
It's exactly like a non-deductible IRA contribution which is sometimes a good idea and sometimes not. It is a good idea if you are in a high tax bracket now, want to defer taxes on tax inefficient income, and will be in a low tax bracket later. (eg: tax arbitrage)

However, I was responding to what I considered to be a comment about double taxation on 401ks loans, which does not exist. (However, after re-reading ogd's comment, I'm not even sure about the point being made.)
I think we agree, except that I would call this double taxation of the loan interest. I would also call the end result of a investing in a taxable account double taxation, or investing in a Traditional IRA with non-deductible contributions double taxation. I would call investing in a Roth IRA or Traditional 401k single taxation.

It's not that I run around saying that taxable accounts are a bad idea because of double taxation. But it does help explain why taking a 401k loan to expand tax-advantaged space is not an obviously great idea. People look at it and think their tax-advantaged space is bigger, therefore that money was taxed once. It was taxed twice, like non-deductible contributions to a Traditional IRA.

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 2:47 pm

LongRoad wrote:
Wed Apr 17, 2019 2:27 pm
Upon withdrawl, the money repaid as interest is taxed. But so is every dollar ever earned (along with contributions) within the account. It makes zero difference whether the money was interest repaid from a 401k loan, interest paid on bonds held in the account, or capital gains from stocks. The money from your loan repayment isn't magically "double-taxed" while stock gains are only "single-taxed". No double-taxation here either.
The interest portion of the payment is different from the other earnings and contributions. To get it into the account, the borrower had to use post-tax income.

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Re: Loans from 401k -- back door investing?

Post by LongRoad » Wed Apr 17, 2019 2:50 pm

ogd wrote:
Wed Apr 17, 2019 2:43 pm
LongRoad wrote:
Wed Apr 17, 2019 2:27 pm
The borrower receives post-tax money and repays the 401k account with post-tax principal and interest, exactly the same as on a car loan. No double taxation occurs here.
Yes, there is double taxation of the interest.

Please read the thread bumping post again: viewtopic.php?f=10&t=160714#p4492155 . The poster isn't actually interested in the loan, if anything the principal will be a burden as they're gonna invest it in taxable. They only care about adding an extra $10k to the taxable account.

The argument for double taxation is actually much simpler than the argument you're thinking of (about the principal): that 10k contribution in a 25% bracket costs them $13.3k of pre-tax money, yet it will only generate 7.5k plus gains at withdrawal if bracket the same. Compare to a 13.3k pre-tax contribution the old-fashioned way, which generates 10k plus gains at withdrawal. Clearly the poster's $13.3k is double taxed.
The double taxation you're seeing is simply the fact that the interest paid is non-deductible to the borrower. If you accept that any such loan is repaid with non-deductible dollars, the illusion of double taxation vanishes.

But if the interest repaid was itself tax deductible, that would be a MAJOR loophole allowing you to cram additional tax-deferred monies into the account, beyond the annual limit.

[Edit to add: OK. I really don't see the advantage of the strategy in the thread-bumping post. They might have been thinking that somehow it equated to adding new tax-deferred money. It doesn't. From the point of view of the 401k, it's just an alternate fixed income investment.]

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Re: Loans from 401k -- back door investing?

Post by ogd » Wed Apr 17, 2019 2:59 pm

LongRoad wrote:
Wed Apr 17, 2019 2:50 pm
The double taxation you're seeing is simply the fact that the interest paid is non-deductible to the borrower. If you accept that any such loan is repaid with non-deductible dollars, the illusion of double taxation vanishes.

But if the interest repaid was itself tax deductible, that would be a MAJOR loophole allowing you to cram additional tax-deferred monies into the account, beyond the annual limit.
Agreed, actually: the poster above WAS in fact looking for just such a major loophole and had zero interest in the loan itself (pun initially unintended 8-) ). The loophole doesn't exist.

I would also add that the double-taxation-when-viewed-as-a-contribution issue also argues for repaying the loan -- when you actually need a loan -- as quickly as possible, because the 7.5% is considerably higher than likely consumer loans and you lose some of it to this taxation. That argument would go away if the interest rates were even, and you'd indeed call it a wash.

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Re: Loans from 401k -- back door investing?

Post by inbox788 » Wed Apr 17, 2019 3:01 pm

centrifuge41 wrote:
Sat Apr 13, 2019 1:14 pm
If the 401k interest rate is high, isn't that a good thing? Can you use the high interest rate to shift more assets into your 401k beyond the 19k annual cap?

For my 401k, for instance, initiating a 60 month 401k loan costs only $114. True, it's billed as an establishment fee + a quarterly maintenance fee, but it is small enough that we can assume it is all up front.

A 50k loan at 7.5% interest leads to a total amount paid into the account of $60,030. So, over the course of 5 years, you can get an extra 10k ($10,030) into the account vs. not taking a 401k loan. You do have to subtract out the fact that the asset growth is now being done via a side taxable investment rather than within a 401k though.
I've always been confused by where the interest goes. Does it really go back into YOUR account? With some whole life insurance policies, the insurance company receives the interest payment. Also, does collateral you put up from the account impact the account? If you have $50k invested in TSM and borrow from it, do you still have that amount invested and gain from the investment? It's similar to the confusion I had around borrowing from whole life insurance policies. And assuming it's all yes, which I'm not completely convinced yet.

What good does it do to to your 401k account to take out $50k today and in 5 years put back $55k in principal and interest? As I'm writing this, I don't see how the payments don't alter the composition of your 401k plan somehow. If you assume the market goes up about 5% a year, that $50k grows about $2.5k/year, so the account would be around $62.5k.

I'm having trouble seeing when it would make sense whether the interest rates were high or low, even if it involved paying yourself. Lending and borrowing hi/hi vs lo/lo is pretty much a wash. The only advantage might be if you can somehow pay a lower rate than the market without changing the 401k account in any way after the loan is paid off or paying the loan directly into the account AND getting the use of the cash in the market at the same time.

Are there 401k plans that do allow this double use of capital?

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Re: Loans from 401k -- back door investing?

Post by jdilla1107 » Wed Apr 17, 2019 3:09 pm

Ketawa wrote:
Wed Apr 17, 2019 2:44 pm
I think we agree, except that I would call this double taxation of the loan interest. I would also call the end result of a investing in a taxable account double taxation, or investing in a Traditional IRA with non-deductible contributions double taxation.
Doesn't a non-deductible IRA allow you to keep track of original basis making the initial contribution not taxed on withdrawl?

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 3:11 pm

ogd wrote:
Wed Apr 17, 2019 2:59 pm
I would also add that the double-taxation-when-viewed-as-a-contribution issue also argues for repaying the loan -- when you actually need a loan -- as quickly as possible, because the 7.5% is considerably higher than likely consumer loans and you lose some of it to this taxation. That argument would go away if the interest rates were even, and you'd indeed call it a wash.
Going back to the formula I posted earlier with some representative values:

Rtax = 3% to represent a 4% mortgage where interest is tax-deductible.
R401k = 2.5% for a bond fund
L = 7.5%
T = 25% for a Traditional 401k

Rtax - R401k * (1 - T) = 1.125%
L * T = 1.875%

1.875% > 1.125%, therefore do not take a 401k loan. Equivalently, prepay 401k loan before investing in taxable or prepaying debt.

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 3:16 pm

jdilla1107 wrote:
Wed Apr 17, 2019 3:09 pm
Ketawa wrote:
Wed Apr 17, 2019 2:44 pm
I think we agree, except that I would call this double taxation of the loan interest. I would also call the end result of a investing in a taxable account double taxation, or investing in a Traditional IRA with non-deductible contributions double taxation.
Doesn't a non-deductible IRA allow you to keep track of original basis making the initial contribution not taxed on withdrawl?
Correct. The initial contribution was taxed once. The earnings will be taxed, hence a second taxation. Compared to a Roth account, that is one more taxation.

I would also call paying taxes on dividends or capital gains a second taxation in a taxable account.
Last edited by Ketawa on Wed Apr 17, 2019 3:20 pm, edited 1 time in total.

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 3:19 pm

inbox788 wrote:
Wed Apr 17, 2019 3:01 pm
I've always been confused by where the interest goes. Does it really go back into YOUR account? With some whole life insurance policies, the insurance company receives the interest payment. Also, does collateral you put up from the account impact the account? If you have $50k invested in TSM and borrow from it, do you still have that amount invested and gain from the investment? It's similar to the confusion I had around borrowing from whole life insurance policies. And assuming it's all yes, which I'm not completely convinced yet.
The interest does go back into your account.

The loan is withdrawn from your account. The borrower is moving money from one account (401k) to another (taxable, pay down debt, home equity, etc).

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Re: Loans from 401k -- back door investing?

Post by ogd » Wed Apr 17, 2019 3:19 pm

Ketawa wrote:
Wed Apr 17, 2019 3:11 pm
1.875% > 1.125%, therefore do not take a 401k loan. Equivalently, prepay 401k loan before investing in taxable or prepaying debt.
Thanks for the numbers! Instructive as always.

I'd personally describe the actual utility of a planned (i.e. non-catastrophic) 401k loan with this sample scenario:

1) You are deciding whether to max a 401k, past the employer match.
2) You can afford it, but are eyeing a home purchase in a few years.
3) You can probably make the downpayment, but are worried that by then it might be higher than you expect.
4) You are considering playing it safe and adding to the downpayment stash instead of the 401k, but don't want to lose the 401k space this year.

In this case, the option of the 401k loan is useful in allowing you to take the likely most profitable route: do max the 401k, if downpayment is high use a (short-lived) 401k loan to make up the difference. It's also a rather fringe scenario, and I think the brilliant minds were mostly thinking about the catastrophic circumstances instead.
Last edited by ogd on Wed Apr 17, 2019 3:21 pm, edited 1 time in total.

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Re: Loans from 401k -- back door investing?

Post by sailaway » Wed Apr 17, 2019 3:20 pm

Ketawa wrote:
Wed Apr 17, 2019 3:16 pm
jdilla1107 wrote:
Wed Apr 17, 2019 3:09 pm
Ketawa wrote:
Wed Apr 17, 2019 2:44 pm
I think we agree, except that I would call this double taxation of the loan interest. I would also call the end result of a investing in a taxable account double taxation, or investing in a Traditional IRA with non-deductible contributions double taxation.
Doesn't a non-deductible IRA allow you to keep track of original basis making the initial contribution not taxed on withdrawl?
Correct. The initial contribution was taxed once. The earnings will be taxed, hence a second taxation.

I would also call paying taxes on dividends or capital gains a second taxation in a taxable account, as compared to a Roth account which is taxed once (at contribution) or deductible Traditional savings (at withdrawal).
Or, you could recognize that Roth is tax sheltered and the other examples are taxes on new money that has not yet been taxed, hence no second taxation.

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Re: Loans from 401k -- back door investing?

Post by LongRoad » Wed Apr 17, 2019 3:29 pm

Ketawa wrote:
Wed Apr 17, 2019 3:11 pm
ogd wrote:
Wed Apr 17, 2019 2:59 pm
I would also add that the double-taxation-when-viewed-as-a-contribution issue also argues for repaying the loan -- when you actually need a loan -- as quickly as possible, because the 7.5% is considerably higher than likely consumer loans and you lose some of it to this taxation. That argument would go away if the interest rates were even, and you'd indeed call it a wash.
Going back to the formula I posted earlier with some representative values:

Rtax = 3% to represent a 4% mortgage where interest is tax-deductible.
R401k = 2.5% for a bond fund
L = 7.5%
T = 25% for a Traditional 401k

Rtax - R401k * (1 - T) = 1.125%
L * T = 1.875%

1.875% > 1.125%, therefore do not take a 401k loan. Equivalently, prepay 401k loan before investing in taxable or prepaying debt.
To clarify: I agree that a 401k loan (or ANY non-deductible loan) will be tax-disadvantaged when compared to a fully tax-deductible loan, as in your example.

But a 401k loan will be tax-equivalent when compared to a NON-deductible loan (while leaving the entire 401k balance invested) over the entire lifecycle.

Compare taking a loan from Freddie's loan shark counter with a 401k loan with identical terms. Your repayments (all post-tax) will be exactly the same in both cases, and your taxes upon withdrawal -- assuming the 401k money you didn't borrow grows in bonds at the equivalent rate, so your ending 401k balance is equal in both cases -- are identical as well.

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Re: Loans from 401k -- back door investing?

Post by inbox788 » Wed Apr 17, 2019 3:30 pm

inbox788 wrote:
Wed Apr 17, 2019 3:01 pm
Are there 401k plans that do allow this double use of capital?
I see in my plan where it does says that the principal and interest repaid does go into my account. It also says when I remove money from my account, that money no longer compounds interest on its own or grows. This makes me think it's treating the amounts I borrow as a withdrawal and putting it back as I repay.

The big advantage for me would be if my account was left alone and used as collateral the same way a house (i.e. unchanged after loan paid off), yet the interest payment would come to me and not the bank. If I have to move out of the house to get the interest payments, it's not much of a benefit to me.

After all is said and done, if I have simply transferred $5k from my checking account to my 401k, isn't this equivalent to an after tax contribution? Which I don't think I have maxed out. The main benefit may be a future Roth conversion. I'm studying the RMD problem and I think I want less not more tax deferred.

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 3:30 pm

sailaway wrote:
Wed Apr 17, 2019 3:20 pm
Or, you could recognize that Roth is tax sheltered and the other examples are taxes on new money that has not yet been taxed, hence no second taxation.
I could also recognize that this is purely semantics.
Last edited by Ketawa on Wed Apr 17, 2019 3:47 pm, edited 1 time in total.

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Re: Loans from 401k -- back door investing?

Post by Ketawa » Wed Apr 17, 2019 3:42 pm

LongRoad wrote:
Wed Apr 17, 2019 3:29 pm
To clarify: I agree that a 401k loan (or ANY non-deductible loan) will be tax-disadvantaged when compared to a fully tax-deductible loan, as in your example.

But a 401k loan will be tax-equivalent when compared to a NON-deductible loan (while leaving the entire 401k balance invested) over the entire lifecycle.

Compare taking a loan from Freddie's loan shark counter with a 401k loan with identical terms. Your repayments (all post-tax) will be exactly the same in both cases, and your taxes upon withdrawal -- assuming the 401k money you didn't borrow grows in bonds at the equivalent rate, so your ending 401k balance is equal in both cases -- are identical as well.
Rtax = X% for Freddy's loan shark counter
R401k = X% assuming bonds grow at equivalent rate
L = X% identical terms as Freddy's loan shark counter

X - X * (1 - T) = X * T

Both sides are equivalent independent of "T", therefore there is no difference in borrowing from Freddy's loan shark counter vs from the 401k. Change some of the variables, and the tax rate "T" becomes important, therefore I think it is appropriate to call it double taxation depending on the context. The context is usually that someone thinks a high 401k loan interest rate is a clever way to get extra money into a 401k.

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Re: Loans from 401k -- back door investing?

Post by LongRoad » Wed Apr 17, 2019 3:52 pm

Ketawa wrote:
Wed Apr 17, 2019 3:42 pm
LongRoad wrote:
Wed Apr 17, 2019 3:29 pm
To clarify: I agree that a 401k loan (or ANY non-deductible loan) will be tax-disadvantaged when compared to a fully tax-deductible loan, as in your example.

But a 401k loan will be tax-equivalent when compared to a NON-deductible loan (while leaving the entire 401k balance invested) over the entire lifecycle.

Compare taking a loan from Freddie's loan shark counter with a 401k loan with identical terms. Your repayments (all post-tax) will be exactly the same in both cases, and your taxes upon withdrawal -- assuming the 401k money you didn't borrow grows in bonds at the equivalent rate, so your ending 401k balance is equal in both cases -- are identical as well.
Rtax = X% for Freddy's loan shark counter
R401k = X% assuming bonds grow at equivalent rate
L = X% identical terms as Freddy's loan shark counter

X - X * (1 - T) = X * T

Both sides are equivalent independent of "T", therefore there is no difference in borrowing from Freddy's loan shark counter vs from the 401k. Change some of the variables, and the tax rate "T" becomes important, therefore I think it is appropriate to call it double taxation depending on the context. The context is usually that someone thinks a high 401k loan interest rate is a clever way to get extra money into a 401k.
I think we agree more than disagree then.

So, no you can't game the system to stuff additional tax-deferred dollars into a 401k by taking a loan.

And, a 401k loan has no tax disadvantages versus an equivalent non-deductible loan. (Of course, comparing it to a completely different loan may have different, and irrelevant, results.) This is the basis for my claim that "double-taxation" is a mental illusion.

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Re: Loans from 401k -- back door investing?

Post by inbox788 » Wed Apr 17, 2019 3:58 pm

Ketawa wrote:
Wed Apr 17, 2019 3:19 pm
The interest does go back into your account.

The loan is withdrawn from your account. The borrower is moving money from one account (401k) to another (taxable, pay down debt, home equity, etc).
Thanks! I found the part of about interest in my plan.

If the loan is withdrawn, I'm missing out on growth, so I don't see the benefit. Also, if my contributions are being added at the same AA as my account, then in/out they remain the same, but what if my AA differs greatly (in my case it does for gradual rebalancing needs), say current AA 75/25, but contributions are at 25/75. A loan would alter that trajectory.

It's an interesting way to deal with a bad 401k and saving some fees, and if that's the best or only source of loan to pay down debt or buy a home, then I see why you'd use it, but I'm still not seeing why someone who had market options (HELOC, HEL, auto loans, etc.) would choose to do this. And if taxable investing was used with similar costs/expense fees, you'd still be paying some taxes that are avoided in the 401k, so your investment would have to overcome those additional hurdles. I was afraid I was missing out on an opportunity to eat a free slice of my 401k cake.

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Re: Loans from 401k -- back door investing?

Post by Earl Lemongrab » Wed Apr 17, 2019 4:25 pm

dm200 wrote:
Wed Apr 17, 2019 1:26 pm
When you take out the 401k "loan" - 100% of the funds you receive come from the 401k liquidating your investments.
So what? Your 401(k) likely has most or all of your fixed income. Consider the loan FI and reallocate to hold more stocks.
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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Re: Loans from 401k -- back door investing?

Post by Earl Lemongrab » Wed Apr 17, 2019 4:26 pm

inbox788 wrote:
Wed Apr 17, 2019 3:58 pm
If the loan is withdrawn, I'm missing out on growth, so I don't see the benefit.
No, unless your 401(k) is 100% stock. You take the loan from fixed income investments.
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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Re: Loans from 401k -- back door investing?

Post by inbox788 » Wed Apr 17, 2019 5:46 pm

Earl Lemongrab wrote:
Wed Apr 17, 2019 4:26 pm
inbox788 wrote:
Wed Apr 17, 2019 3:58 pm
If the loan is withdrawn, I'm missing out on growth, so I don't see the benefit.
No, unless your 401(k) is 100% stock. You take the loan from fixed income investments.
I didn't get that far along the loan process to see that option.

So if I have $50k in BND yield 2.72% in my 401k and I want to borrow $50k to buy a car to be paid off in 5 years, does it make sense to use my 401k at 6% loan rate? My alternatives are manufacturer loan at 2% or failing that 4% at credit union. I will use $1000/month from my paycheck to pay off the loan and any left over will be put in my piggy bank. [the piggy bank is worth a little more if I put it in an interest bearing account or invest it]

If I get the 2% manufacturer loan, my 401k grows to about $57k.

50k/2.7%/5yr, 57,124.48 Your total balance, Your earnings $7124.48
https://www.bankrate.com/calculators/sa ... lator.aspx

Meanwhile, $876.39, $2,583.28 total interest paid and my piggy bank has $7416.72. https://www.bankrate.com/calculators/mo ... lator.aspx

If I got the 4% credit union loan, my 401k is left alone so same as above and and I have $4750.43 in my piggy bank.
($ 920.83 Total Interest Paid $5,249.57)

If I did the 401k loan at 6%, my 401k would have $58k and my piggy bank would only have $2k.
(Monthly Payment 966.64 Total Interest Paid $7,998.40)

A lower loan rate leaves less in my 401k and a higher loan rates takes from my piggy bank, so loan rate isn't much of a factor. The alternative loan cost would have to be higher before the 401k begins to makes sense (or bond rate return lower).

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Re: Loans from 401k -- back door investing?

Post by tfb » Thu Apr 18, 2019 9:24 am

LongRoad wrote:
Wed Apr 17, 2019 3:52 pm
And, a 401k loan has no tax disadvantages versus an equivalent non-deductible loan. (Of course, comparing it to a completely different loan may have different, and irrelevant, results.) This is the basis for my claim that "double-taxation" is a mental illusion.
Exactly. Therefore the loan interest isn't double-taxed either. You pay tax on wage income regardless from whom you get the loan. You pay tax on [traditional] 401k earnings regardless from whom the 401k gets its earnings. People don't call paying these two taxes "double-taxed" when you just get a loan from a bank. When you happen to get a loan from the 401k, you still pay the same two taxes and you are in the exact same position financially.
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Re: Loans from 401k -- back door investing?

Post by dm200 » Thu Apr 18, 2019 10:05 am

inbox788 wrote:
Wed Apr 17, 2019 3:30 pm
inbox788 wrote:
Wed Apr 17, 2019 3:01 pm
Are there 401k plans that do allow this double use of capital?
I see in my plan where it does says that the principal and interest repaid does go into my account. It also says when I remove money from my account, that money no longer compounds interest on its own or grows. This makes me think it's treating the amounts I borrow as a withdrawal and putting it back as I repay.
The big advantage for me would be if my account was left alone and used as collateral the same way a house (i.e. unchanged after loan paid off), yet the interest payment would come to me and not the bank. If I have to move out of the house to get the interest payments, it's not much of a benefit to me.
After all is said and done, if I have simply transferred $5k from my checking account to my 401k, isn't this equivalent to an after tax contribution? Which I don't think I have maxed out. The main benefit may be a future Roth conversion. I'm studying the RMD problem and I think I want less not more tax deferred.
Yes - the investments are liquidated when you get the 401k "loan".

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Re: Loans from 401k -- back door investing?

Post by whodidntante » Thu Apr 18, 2019 10:36 am

inbox788 wrote:
Wed Apr 17, 2019 5:46 pm
Earl Lemongrab wrote:
Wed Apr 17, 2019 4:26 pm
inbox788 wrote:
Wed Apr 17, 2019 3:58 pm
If the loan is withdrawn, I'm missing out on growth, so I don't see the benefit.
No, unless your 401(k) is 100% stock. You take the loan from fixed income investments.
I didn't get that far along the loan process to see that option.
It does not matter where you custodian draws the source funds from to fund the loan. You can trade to restore your desired asset allocation.

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Re: Loans from 401k -- back door investing?

Post by inbox788 » Thu Apr 18, 2019 12:01 pm

whodidntante wrote:
Thu Apr 18, 2019 10:36 am
inbox788 wrote:
Wed Apr 17, 2019 5:46 pm
Earl Lemongrab wrote:
Wed Apr 17, 2019 4:26 pm
inbox788 wrote:
Wed Apr 17, 2019 3:58 pm
If the loan is withdrawn, I'm missing out on growth, so I don't see the benefit.
No, unless your 401(k) is 100% stock. You take the loan from fixed income investments.
I didn't get that far along the loan process to see that option.
It does not matter where you custodian draws the source funds from to fund the loan. You can trade to restore your desired asset allocation.
I try not to trade my 401k account, even if it's a few hours or days. By default, they could ask, or simply take it out of certain funds in some order or take it out in proportion. I wouldn't expect all plans to be consistent unless there were a regulation, so I'd assume it's fund dependent unless otherwise. If I had to do all that work to figure out how to restore my desired asset allocation, it's another disincentive to using this loan.

Anyway, looked at it and I can't seem to come up with a compelling reason for me to use it. Any benefits have to overcome the lost opportunity cost, which even in BND is quite high.

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Re: Loans from 401k -- back door investing?

Post by ogd » Thu Apr 18, 2019 2:22 pm

tfb wrote:
Thu Apr 18, 2019 9:24 am
LongRoad wrote:
Wed Apr 17, 2019 3:52 pm
And, a 401k loan has no tax disadvantages versus an equivalent non-deductible loan. (Of course, comparing it to a completely different loan may have different, and irrelevant, results.) This is the basis for my claim that "double-taxation" is a mental illusion.
Exactly. Therefore the loan interest isn't double-taxed either. You pay tax on wage income regardless from whom you get the loan. You pay tax on [traditional] 401k earnings regardless from whom the 401k gets its earnings. People don't call paying these two taxes "double-taxed" when you just get a loan from a bank. When you happen to get a loan from the 401k, you still pay the same two taxes and you are in the exact same position financially.
The double-taxation is from the interest receiver side, a perspective that LongRoad and yourself don't seem to be considering. The buck doesn't stop with you paying the interest, you also care about how much of it you get. After all, one of the major advertised attractions of the 401k loan is that "you pay the interest to yourself". Sure, you could say that the lender also pays taxes on interest, but for the borrower that's typically rolled into the rate and/or the lender may not actually pay much. But when it's you getting the money, you certainly care.

Here's how the blanket statements that "loan interest isn't double-taxed" and "you pay it to yourself" can lead one to wrong conclusions:

Q: Isn't it better to pay 7.5% to myself than 2% to others? (btw I'm in a 30% tax bracket)
A: No, because you lose more than than 2% to taxes, as the post-tax interest money gets reclassified as pretax 1:1.

Q: Can't I use the 7.5% interest I pay myself to bump up the value of the 401k? (question that revived the thread above)
A: It's a very inefficient route to contribute, and even after-tax 401k is better. (response above)

Seriously, this money has bad tax treatment, about as bad as any other interest you receive, except it's a much larger "yield" than those. Maybe you think the notion of "double-taxed" is vague or doesn't apply, but shouldn't we at least say something to the effect of: beware that the "interest you pay yourself" has really bad tax treatment ?

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