Once I had to take a 401k loan. Wasn't something I wanted to do. But it wasn't good times, so had to make the best of it. Under the circumstances would do it again. Now far past those times.
GREAT information! The title of this video says it all ! It is a good reply to some of the reasons some have stated below that were beneficial reasons. Some successes were just due to blind market timing & hitting it right, proved to be successful. I found a lot do not pay back the loan and have a distribution and taxable event; & now have depleted their retirement account. In my 40+ year career in the finance industry I had far more clients regret borrowing against their retirement accounts at a later date, than "win". Each would be a case by case situation; but overall there are far more losers than winners with my client IMHO.
From the perspective of your 401(k), a loan is the same as a bond. A bond is lending money to government or company, while a loan is lending money to the beneficial owner of the 401(k). With that in mind, if you rebalance to maintain your asset allocation while accounting for the loan, then you don't miss out on any growth and in fact your loan may be the best paying bond your 401(k) can get.
My HVAC went bad and I needed to take out a $3,500 loan from my 401k to pay to replace it because I didn’t have enough cash on hand. Since then my 401k’s value has dropped, meaning repaying the loan and paying interest is better than leaving the money in my 401k and taking a personal loan out would have been. If my 401k had been growing I would have taken out a personal loan instead of borrowing from my 401k. I only did it because the economy is bad and my 401k’s value is going down. I’ll have the loan paid back before the markets start growing again.
401K loan repayment is governed by the plan details. Not all of them require immediate repayment if laid off. At my former employer, if a person got laid off their job or otherwise left, only a borrower who had previously defaulted on a loan had to pay it back right away. If you had no prior default, you could pay it back on the original repayment plan.
It’s actually federal law, not your 401k summary plan that dictates repayment of loans when you separate from the employer. As of 2017 you now have until your next tax filing period to pay the loan off, not 60 days. And this applies to everyone, including your former employer.
Don't know if we made the right call here or not, but in 2008, me an the wife had a 401 that kept losing money, so we closed it out, an payed the penalty, an invested in some raw land real-estate, that has gone up in value. Not sure of the percentage, but its still going up, an I hung around for the bloopers. Thx for the vid Geoff. P.S. I like the hand signal for a rock an roll lifestyle, lol
That depends. The S&P 500 is about 4x to 5x its value compared to 2008. 10k invested in 2008 would have yielded about 50k at the end of 2021. of course, 2022 has been a rough year so far, which makes land look safer. Having said that 2008 was a rough year for real-estate as well - who knows what it will do in 2022 or 2023.
I agree I took out a $30k down payment loan for my home but..my plan is to retire at full retirement age which would put me at a better than rent situation and tax advantages so I will decide what the next step is at that time.Super video !Thanks
I took a loan from my 403b a few years ago to pay off student loans and it was one of the biggest financial mistakes of my life because it negatively impacted future compound growth and that can never be recovered, no matter how much I contribute in the future. Lesson learned.
My wife and I both did this for a home remodel. My retirement was not in a 401k, so I "took the tax hit" and paid the taxes on my withdrawl. Hers was a 401k and she's going to be able to pay it all back in 3 years. Why we did it. We didn't want to take out a loan with the bank. Because the bank loan "front loads" the intererst portion (vs. the principle portion), we would have had to pay tons of interest by the time we'd have been able to pay the loan back. No regrets...
"Because the bank loan "front loads" the intererst portion (vs. the principle portion), we would have had to pay tons of interest by the time we'd have been able to pay the loan back. No regrets." If you belong to a credit union you should have checked with them. They typically have simple interest loans.
I borrowed because I was buying a house. I was also selling a house, and the sale more than covered the purchase, but in the meantime, all the fees were running down my savings. It turned out that I didn't need the loan after all, and I paid it back within a month, but I felt better with the extra money as a cushion.
I have borrowed from my retirement funds twice. First time a 15K borrow to pay for a new roof on the 4 unit rental I lived in, a capital improvement. The loan from/to myself was set at 10% between rental income and my full time job pay back was easy and I got the interest rather then a bank. The second time was a 40K parking of funds into a bank account from retirement funds to cover a down payment so the underwriters would approve my financing of a property I wanted to buy.. I had no cash on hand but I did have 40K borrowable from my retirement funds and I had a much larger Line of Credit so I parked the 40K in the Bank account , the loan was approved, moved the 40K back (withen 60 days) and used the Line of credit for the down payment on a new to me rental property. Everything paid off .. stale equity in retirement funds and real-estate was utilized and capital improvements and new property was achieved.
I have pretty sizable 403b savings and 7 or 8 years ago, we borrowed up to a total of about $40K to help us come up with down payments on investment properties. We paid them off within 3-4 years and paid net 3% interest on the loans ( and, of course, we had opportunity costs in that the money borrowed wasn’t earning money in the market). Nevertheless, the return on equity on the rental properties FAR exceeded the sum of the interest and opportunity costs. Throughout the loan period, we were still maxing out our contributions to the retirement (403b) account. Overall, the loan enabled us to build a third income leg in my upcoming retirement. We’ll have Soc. Sec., rent from the homes we bought, AND funds from our 403b accounts (albeit slightly reduced from loss of growth due to the 3-4 year loan period). We came out WAY ahead. Caveat: I have a very secure job - tenured faculty position. So job security is high.
If you borrow money prior to this major downturn, and are paying yourself back throughout this chaos weekly, you will certainly make out MUCH BETTER in the long run.
Maybe 1. If you're the end of your career and have a large portfolio 2. If you timed it where you got your loan processed when it was down towards the bottom say maybe 15% point or more 3. Depending on the amount your company charged to take the loan 4. If you didn't get laid off and couldn't pay the money back if that happened
I would rather live in a van down by the river before I violated the sanctity of my retirement accounts before retirement...of course I'd outfit it with solar, A/C, a wet bath with a composting toilet, a flat screen and spend my days fishing, swimming, and having a grand old time. I've got a $35 Timex that I don't wear much anymore because I've got a flip phone that has the time, alarm and a calendar.
With a 401K, we pay ourselves 6 percent. A while ago the stock market looked like it was going to be flat or worse for at least a year. We took out a 401K loan to pay off our car and came out ahead of the market that year. What are the chances of that working for any one year? Under 1 in 10. That year I happened to guess my projection correctly.
I took loans during the 2007 stupidity. As I repayed my loan everywhere the stocks were dropping . I was using dollar cost averages to grow shares. When market started to recover, those cheaper shares helped grow my portfolio. Learn how to make things work for you instead of listening to people tell you it's a bad thing.
A 401(k) loan is not desirable, but compared with other debt you might be stuck with it *might* make sense. If you find yourself stuck with high-interest debt (e.g. credit cards)... would you rather be paying the interest back to yourself, or Visa? I used this successfully to pull my "younger" self back to a more stable financial position. But I was very careful to keep the 401(k) loan to less than 10% of my balance, and keep the payment time short (3 years). I have a friend who used it for the entire down payment of his house, and he got hosed. It's like having two mortgages, one on the house and another on your down payment. THEN he lost his job, and they wanted the whole amount payed back in 60 days. Not good.
You didn't say anything about avoiding mortgage insurance because you put more money down. That's what I did in '93 when I purchased the house I'm in now. PMI was about $50 per month back then. Paid the loan back on my 401k early and paid my house off in 2017.
What if the market is up and been up for a decade and you are worried about a correction and would like to protect your account? Could you take out a loan, pay yourself 7% interest basically insuring a return, would it be a good idea then? But, I do feel that borrowing against your 401K is robbing your future self.
Since the 7% return is coming out of your pocket (eg your discrentionary spending account), it seems to me that you'd be better off contributing that 7% to a roth IRA. That way the 7% can grow tax free into retirement.