The Pros and Cons of 401(k) Loans
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- Опубліковано 22 жов 2017
- 401(k) loans are incredibly polarizing. Some investors view them as useful financial tools while others think they should be marked with a skull and crossbones. Financial planning expert Michael Kitces discusses this topic with Christine Benz.
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So it would make pretty good sense to take a loan out when a market is tremendously overvalued like it is today, because, say, over a 5 year repayment period you'll very likely be buying back in during corrected market prices?
Super good. I saw Kitces' face in the thumbnail and knew it was a good place to start my research on this topic :D
I think three features of the 401k loan that were not mentioned here were:
1. The 401k loan does not require a credit check. Thus, if you are attempting to avoid and excess number of credit inquiries, this is preferable.
2. Conversely, if one were to leave employment abruptly, or if the plan sponsor were to discontinue the plan, the loan amount is due immediately or tax consequences ensue.
3. Under the JOBS Act, the tax deduction for mortgage interest and home equity line of credit interest have been replaced with a standard deduction. This makes for a more involved discussion around the tax advantage of a HELOC over a 401k loan.
Good points....Some 401k loans do not have to be paid back upon separation and new loans may even be available after separation. Yes, it's rare but don't assume.
Excellent video. Very eloquent.
I always take my 401k loan proceeds from the fixed income allocation funds. They pay 1-2% so I know that is the opportunity cost of the 401k loan. If the custodian does not allow selecting a specific fund for the loan proceeds you may need to adjust the overall asset allocation to accomplish this.
So if I take a 401k loan..as I'm paying it back, does my account still accumulate if I want it too along with the payment? And does it recieve the match the company offers as well?
Bottom line is don't do it. Don't put yourself in this position. Get an emergency fund going!
Bottom line, the 401k is going to crash. Dollar will collapse. Get money while you can ;)
@@hahtsauce that is my emergency fund
@@hahtsauce no, do some research
@@jeffmartin7214 inflation is coming
I put all my extra money in 401, keep $1000 in my checking. If you build a higher amount emergency fund you lose the possible growth if it were in a 401 account
If you default on your 401 loan and already file it on your income tax return?is that already disappear from your 401 record,and what happen when you retired?
How about taking 401k loan to write off a high interest loan?
Thanks for the video! One question tho: is there some sort deduction in interest payments when lending for a down payment on your first home?
If you can plan for it Invest in a Roth IRA if you want to do a down payment on a home. For most people, you can put in 5,500 per year and you can take out something like 10,000 for a down payment on a home. The down payment for a home seems like it might be a longer-term investment and therefore be treated as a distribution and be subject to penalties.
Obviously, don't trust me on that but hope that helped.
@@YT.Armorchampion148 thank you for the info! Definitly helpful
@@YT.Armorchampion148
It's $6,000/yr and the $10,000 thing isn't quite accurate.
You can take out all of why you contributed to the Roth IRA for any reason tax and penalty free. You can then take out up to $10,000 of earnings for the house, but not tax free. That part taxes will be owed. Only the penalty is waived, not the taxes.
Interesting.... Im looking at taking a loan from my 401k to pay off my house. Monthly is 805 if I take the loan and some savings it will be paid off and my monthly back to my 401k is about 440 a month. I could pay it back into my 401K if needed in the next 7months. Decisions!!!!!
if thats true then why not, it seems to make all the since in the world if your job is funny style or shady???
Yea they arnt dirty or shady at least I don’t think haha
Just take the 7 months to pay off the mortgage. Don't move your debt to your 401(k).
I work in the retirement services department for a major institution. The problem is, most plans require a full payoff within a certain period of time if you separate from the company. People don't think of the worst case scenario. If you dont pay it in full within the period of time, usually 60 days, then it becomes taxable. Taxes can be up to 40% depending on your fed tax bracket, plus a 10% penalty for defaulting on the loan. Thats a like a loan from a payday loan place. If you take one, make sure you can pay it off if needed. If you pay it in full, its probably the cheapest loan you'll get at the moment.
youngB
I knew this in 1987 when I started my 401k. It was explained and in writing.
People don’t listen or read their documents.
They are also ignorant of 30 years of contributing,reinvesting,and compounding.
Very simple.
Stay out of debt, live within means,build savings and emergency fund, then contribute to retirement what you could afford to put away for years untouched.
The other side of loans from the 401k your borrowing pre-taxed money and paying it back with post taxed money and it then is again considered pre-tax money when you withdraw it later and pay taxes on it again
2K on Shiba with a 5.25% interest rate during a crypto bubble?
How do you pay the interest back to yourself?
They force you to pay 5% on the amount you withdraw. That 5% just goes into your 401k account thus paying yourself.
@@seancoakley9640 so whats a better option than a 401k loan, a low interest loan?
@@dirtycarpet6134 yuuup that would work, but better than a low interest loan is a low interest loan that is also tax deductible.
@@luiscolon921 how do you insure that it will be a loan that is tax deductible? ask for that kind of loan?
DIRTY CARPET the HELOC loan is the only loan that I know of that is tax deductible (interest paid) and only under certain circumstances. the best bet is to find a loan that has a very low interest rate.
It's just a water heater. Not hot water heater. Why would you heat your hot water
You pay back with after tax money
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This is one reason people can't retire from work they hate, life is to short
401 K money is pre tax, you are paying back with after tax money, and then pay tax on it again when you take it out in retirement
That's a wash. The money comes out tax free when you took out the loan, that's why it doesn't go back in pretax. You weren't taxed on it in the first place.
Yes, but what you are missing is when it goes back in after being taxed, it gets taxed again when you withdraw it. 401 Ks are great, because money goes in pre tax, and you only pay tax at the end when you withdraw it. Loans and post tax pay backs completely alter this simple math, most people don’t realize it.
Taxed twice vs taxed once is not a wash
If loan payments went in pretax, I would continuosly take out loans to get the deduction putting it back in. Double deduction. Take out another loan, triple deduction. Do it every year so I have a $0 taxable income from all of the loan payment deductions.
It doesn't work like that. You only get the tax deduction once. And again, the money you get from the loan is tax free. What you are paying back is money you received tax free. It would make zero sense to get a tax deduction from tax free money. It's essentially a tax deduction at a 0% rate because that's the the tax rate you paid on the loan proceeds.
Here's another way to explain.
Normally, a withdrawal would be taxed but with a loan it isn't. You are getting a deduction. It's being applied to the withdrawal instead of being applied to the payments made back.
Why does he not mention that you are being double taxed on this loan. Yes you pay yourself interest on the loan: great. When you are paying your loan back via payroll deduction you are doing so with after tax income. Years later when you start to draw on the 401K in retirement you are being taxed on the contribution and any growth on the investment. If your average tax rate is 22% you'll have paid that on the loan payback. Assuming your income will be about the same in retirement you'll then be paying that along with any long term gains your investment garnered over the years.
lmao nlost 100k
Pay interest on your own money...fucking joke
Doesn't the interest go back to your 401k account so your basically putting more money back into your account than you borrowed?
@NYPAPY1 yea I think it does....I misunderstood it
You borrow money from yourself and pay yourself back with interest. Yes please!
You're not getting extra money or "free lunch" by paying yourself interest. It's essentially a forced extra contribution to your 401(k).