401k loan with current market

I am thinking about taking a loan out to pay off some debt that currently has an interest rate. Everything else I have is on 0% for now. Just to get caught up on my finances.

Currently my 401k is at a -9% ROR. So basically I am not making any money of the 401k and don't see it dramatically getting better. The loan I calculated will cost me a 100 fee over a full year vs interest that could be in the range of 7-1000. The interest rate for the loan i 6% almost but everything I pay will go into my 401k except the fee as I understand

Is this a good plan? I know the loan says I am going to lose like 100k of investment return but I dont believe that when my ROR is negative and I PLAN to payoff the loan in a year.

 

My rule of thumb...never touch retirement unless it's absolutely essential....ie medical, losing house, ect.

You say you can pay the loan off in a year. I'd personally rather take a year and a half (debt plus interest) to pay off the debt than take a 401k loan.

Yes your current rate of return might suck. But that's the time to not take money out. It will go back up just like it has throughout history.

 

Withdrawing from 401k and taking a loan against it are two wholly different ideas of "touching". I'm not a money guy but I have couple friends, much smarter than me, suggest such a tactic for debt. If you are to some degree certain that you will be able to pay it back, it may make sense... Especially if the a) the interest rate for the loan (your new return) outperforms the market and b) the interest rate is lower than your current debts'.

But everything carries a risk... Most of my friends used 401k loans instead of taking school loans out which, at that age, there's plenty of time to take substantial risks and recover.

 

Yeah i am only 28. I have a decent amount in my 401k but not a whole lot so I am only making maybe 400 bucks a year in gains. I was planning to take 7k out and pay off most of my debt with interest. The debt I pay off, the payments will total about the payment of the loan payment. So in theory nothing changes I just wouldn't waste money on interest but lose a little bit on gains if I had any at this point.

It is a loan. So I am not losing the 30% tax or whatever. This is in hopes by next year I am debt free but my truck. I wouldn't stop my contributions either.

I also save an emergency fund in the case I lost my job and needed to pay it back. This seems like the best idea to me and it also forces me to pay back the loan without spending money on mods etc. Kinda self policing myself.

 

Oh I hear ya on that. Definitely have learned from other people this problem with cc's.

 

Consult your accountant before taking out a 401K loan they could have some substantial tax ramifications. This should be your last resort.

 

my 2 cents
the whole "if you did lose your job"......payment is due in no more than 90 days...otherwise...you pay your tax rate 25-35%..+the 10% Penalty(I realize you have a emergency fund to cover this)
The problem is your trying to move debt(this somehow makes u feel like you are moving the needle.....but your not). How about you "temporarily" stop Contributions to your 401k and make the payments you would made to this loan and the 401k contributions and get focused to paying off this debt......you say this 7 k covers the loan that is charging "Interest".....but what about these "other" loans that are at 0%.......it's not going away if your playing with the numbers.....get on a budget and get focused....I think you have the ability to do it.....give it a try

 

Yes no tax implications unless I default or I lose my job and can't pay it off. I will get taxed on the interested paid but it will be very miniscule.

I realize it is just transferring debt. I don't get 401k matching so I could stop contributing but if I do it will cost me in tax......I dont know which is higher the tax on my salary vs interest over a long term of say a year but I am assuming the loan is cheaper.

 

This seems the most logical to me. I just hope it doesn't effect home loans as I am hoping to apply for one in 6 months.

 

http://www.investopedia.com/articles/retirement/06/eightreasons401k.asp

 

@dcsbtaco

This is in all anticipation to apply for a loan in six months(maybe later) and then possibly purchase a house in the next 6 months. I don't necessarily have a money issue now, but I want to get out of cc debt ASAP. If that makes sense.

@scocar

Thanks for the article. It has some very valid points but most I think don't apply to me.

-I can still contribute which I will around 6% from my previous 15%.
-I am actually losing money (and hopefully over a year it will be the same). My ror is -9% it was -12%. Maybe I need to look at different investments.
-I have set it at 1 year and possibly sooner depending on my financial situation.
-I do have a 3 month safety net that keeps building

Most of the other things are correct. I realize I am now living beyond my means firstly because I have had to help out family members financially and I don't know exactly when I will get that back. Wasn't the smartest move by me but its family and to say the least I am owed more than the loan I am looking at.

Thoughts? Thank you for all the advice.

 

I usually take out a loan on my 401k every 2 years since it has the lowest interest of my banks. With that being said I only take it out for 12 months and pay it off, comes out of my check so I don't even notice it.

 

So I looked at this in my spreadsheet and it basically gets me to the point I was 9 months ago financially. This seems to me a good spot and thus my payments would just go to the loan along with the rest of my paycheck to the other bills.

 

you are correct it is a loan.....but if he lost the job there and its not payed back in the 60 or 90 days......it is then calculated as a early distribution withdrawl.....and they will tax it according

 

your not really losing money.....the market is fluctuating as it always does......if it didn't you would only make a slight gain......you have to think in a different mind set.....if the market is down over the last year 9-12%.....that means u are getting 9-12% more stock everytime you buy with your contributions....... so when It levels out....u made that much...a stagnant market makes little to no money

 

I didn't have the patience or energy to explain this the other day. Dollar cost averaging. http://www.investopedia.com/terms/d/dollarcostaveraging.asp

Also, when the economy went south and all funds were down, I increased my contributions to my 401k, because you know in time (before you retire) it will come back up, and you will get a big pop. Down markets provide opportunities to buy, and one of your financial goals should be to have enough savings to take advantage of easy opportunities like this, because it is far too hard these days for us average schmucks to play the market or make money trading stocks. Long-term buy and hold is a good basic strategy, and for retirement, it is pretty much the only strategy (excepting the need to shift more from stocks into bonds toward the end).

But this gets back to the OPs original issues. You need to have different financial tools and use them for the correct purpose. Don't use a torque wrench to drive a nail.

 

If you have good credit, you should easily be able to open a new credit card account with a promo offer of 0% interest on balance transfers and cash advances for 18+ months. Then diligently pay that off every paycheck without charging more. There will be a fee which may or may not make it worth while depending on your terms.

Personally the only money I would borrow from a 401k is to help with a down payment on a house, not to shift debt.

 

Fair notice, I did not read the other responses...

Your return may show down for so far this year but, if your plan is like mine, you've not actually lost anything until you've made a type ow withdraw. The plan I am in actually sells assests to provide a "loan". Once it's sold, you've had a loss in your plan. If I understand it correctly, you will however be paying yourself back with interest...just hope you're not paying yourself back if the price of your investment goes up.

 

Hmmmm. Yes it seems I would be selling the assets I have at the current price, which would put me at a loss. The interest I do pay back will go to the loan, although it will be post Tax. However it would be taxed again when I withdraw. This is changing my viewpoint.

I have around a 710 credit score. Its okay. I have always had it around 750. My reasoning for not opening a new cc is that being 28, and most of my cards only 3-4 years old my average account years is low. I know this is one of many things a lender looks at when applying for loans. Also it would put a hard inquiry on my credit, which will also lower my score(if I fall into a certain bracket).

I am also looking into selling the truck and purchasing a 2000's 1st gen with the equity I have in the loan. This would give me no truck loan and an extra 400 a month to put towards debt. There are quite a few nice 1st gens on the market right now.

 

I think the house is not the best idea in six months of maybe even a year.
If for some reason you do end up buying a house cut the figure they say you are qualified for a 1/3 to 3/5.