I borrowed 25k from my 401k about 4 1/2 years ago. I sent that towards my mortgage which at that time was around 60k. I’m now mortgage free and I’m almost done paying back loan.
@@keny46 5.5 interest. House was 87k. My bank approved me for up to 130k, but I decided to stay humble and not be house poor. It worked out for me, also at that time I was only making about 40k a year.
@@jukejoint523jordan6best decision I ever made. After I paid off my mortgage I was able to contribute more to my 401k. Now it’s at 20% contribution. No mortgage and debt free.
If you can promise yourself a 10% return on a small portion of your 401k that isn’t horrible but like you said you should really understand the conditions of your loan… it would suck to miss out on free money from employer matching
The double taxation comment is misleading. Suppose you buy a car with either a 401K loan or an auto loan. In either case you’re paying it off with after-tax money. The money a bank would loan you for the car is tax-free when they write the check, like the 401K loan, and is repaid with after-tax dollars. If the thing you’re using the loan for happens to be tax deductible, say a business-startup expense, then there’s no tax on the loan repayment.
Great informative video. I'm a bit confused about the "repay in after-tax" dollars scenario at the 3:48 mark. Could you explain that a bit more? Thank you
Pretty much you contribute to your 401k with pre tax dollars (gross income), but when you take out a 401K loan you have to pay it back with post tax dollars (net income). This is just like you would with pretty much any other loan you take out and have to pay back. It's viewed as a con because technically you are paying taxes on the same money twice. When you pay the loan (after tax dollars) and when you retire and start making withdrawals.
I have about 200k in my 401k and was gonna take out 25 to 50k, but my loan is being repaid weekly out of my check where I don't see it coming out. I wanted to invest some in an ira and put back for emergency. I'm only 42 and been with my company for 16 years and looking to do 20 with them anyway.
You can do what you want to with the loan amount, why can't you use it for savings and IRA? I'm not saying you should, just questioning your logic/motif
TSP wont allow me to get a loan because im retired from the federal gov … it is only when you are actively working and contributing to the TSP with federal pay. TSP also won’t accept retirement pay as a contribution which disqualifies a retiree from getting a TSP loan. Makes no sense im thinking about transferring my money into another institution
I don’t understand the double taxation part (pre tax/after tax)? If you take out let’s say 1,000 loan from 401k and you’re able to pay it back in one year + the interest. What does the taxation do?
It's a misleading red herring that makes no real difference in taxes paid. Your paycheck becomes after tax money once it enters your bank account. If you take out a bank loan (or loan from car dealership to pay) for car or other large purchase, you're using already taxed money. If you take out 401(k) for that car purchase, you're paying back the 401(k) loan with after tax money. So either way you use after tax money to pay for either loan. You never paid tax on your 401(k) contribution but you owe tax once you withdraw it at retirement. So-called "double taxation" is meaningless distinction without a difference.
@@alrocky it’s still double taxed, because you’re paying it back with taxed money and get taxed when it’s withdrawn, and you’re taxed on the interest you paid too, which is double taxed. But Americans get taxed double and triple times on their money across the board anyways. Taxes are ubiquitous. Max out your Roth IRA annually. In fact, take a 7,000.00 loan from your 401k every January, plop it into the Roth IRA, then pay that back through that year, wash rinse repeat
The loan immediately becomes due and they will use your existing 401k to pay it back as if it you withdrew it. Meaning you will incur the penalty from withdrawing it before retirement and taxed as well.
so assuming your plan allows for contributions during the loan period, if you make personal contributions on top of your loan payments it seems like you come out exactly the same as if you didnt take the loan out after 5 years. This means the 25k of the loan was pure profit and if invested correctly, could even have lead to more growth? The con you mention is most people don't make those personal contributions to their 401k on top of loan payments.. but if your 401k contributions come straight out of your paycheck before it hits your bank account, youre guaranteed to be making those contributions, so it sounds like a win win to me? Am i missing something? I'm about to take a a 401k loan myself and just want to make sure I take full advantage and do it right.
When your money is in the market, it makes money, and don't forget to account for the power compounding growth. When you take out that 25k, it's no longer leading toward tax-deferred growth.
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I borrowed 25k from my 401k about 4 1/2 years ago. I sent that towards my mortgage which at that time was around 60k. I’m now mortgage free and I’m almost done paying back loan.
I'm looking into doing that now on my 48k home loan
What was your mortgage interest rate?
@@keny46 5.5 interest. House was 87k. My bank approved me for up to 130k, but I decided to stay humble and not be house poor. It worked out for me, also at that time I was only making about 40k a year.
@@jukejoint523jordan6best decision I ever made. After I paid off my mortgage I was able to contribute more to my 401k. Now it’s at 20% contribution. No mortgage and debt free.
BEST VIDEO on UA-cam regarding this stuff
Thanks for the explanation, I learnt a lot. ❤
Just found your channel. This is such smart information -- thank you!!!
Really good video!
Great explanation. Thank u
Great video. Thank you!
Many thanks i was just doing some research on my 401k , then poof your video popped up wow 🙌🏽✨
I've tried magic and it didn't work out well for me
Great info. Knew some of this info, but awesome to get the in-depth info I didn't know. Thanks 👍
Of course!
If you can promise yourself a 10% return on a small portion of your 401k that isn’t horrible but like you said you should really understand the conditions of your loan… it would suck to miss out on free money from employer matching
I'm watching.
The double taxation comment is misleading. Suppose you buy a car with either a 401K loan or an auto loan. In either case you’re paying it off with after-tax money. The money a bank would loan you for the car is tax-free when they write the check, like the 401K loan, and is repaid with after-tax dollars. If the thing you’re using the loan for happens to be tax deductible, say a business-startup expense, then there’s no tax on the loan repayment.
Great informative video. I'm a bit confused about the "repay in after-tax" dollars scenario at the 3:48 mark. Could you explain that a bit more? Thank you
Pretty much you contribute to your 401k with pre tax dollars (gross income), but when you take out a 401K loan you have to pay it back with post tax dollars (net income). This is just like you would with pretty much any other loan you take out and have to pay back. It's viewed as a con because technically you are paying taxes on the same money twice. When you pay the loan (after tax dollars) and when you retire and start making withdrawals.
It's really not a meaningful consideration. You repay with after tax dollars with either 401(k) loan or bank loan.
I have about 200k in my 401k and was gonna take out 25 to 50k, but my loan is being repaid weekly out of my check where I don't see it coming out. I wanted to invest some in an ira and put back for emergency. I'm only 42 and been with my company for 16 years and looking to do 20 with them anyway.
$50,000 401(k) loan is excessive for IRA as $7,000 is contribution limit.
You can do what you want to with the loan amount, why can't you use it for savings and IRA? I'm not saying you should, just questioning your logic/motif
Great video. I didn't realize you cannot make contributions while the loan is due.
When I worked for HD Supply their IRA would allow you to repay the loan and still contribute. Maybe it’s plan sensitive
TSP wont allow me to get a loan because im retired from the federal gov … it is only when you are actively working and contributing to the TSP with federal pay. TSP also won’t accept retirement pay as a contribution which disqualifies a retiree from getting a TSP loan. Makes no sense im thinking about transferring my money into another institution
Who gets the interest me or the broker ?
I don’t understand the double taxation part (pre tax/after tax)? If you take out let’s say 1,000 loan from 401k and you’re able to pay it back in one year + the interest. What does the taxation do?
It's a misleading red herring that makes no real difference in taxes paid. Your paycheck becomes after tax money once it enters your bank account. If you take out a bank loan (or loan from car dealership to pay) for car or other large purchase, you're using already taxed money. If you take out 401(k) for that car purchase, you're paying back the 401(k) loan with after tax money. So either way you use after tax money to pay for either loan. You never paid tax on your 401(k) contribution but you owe tax once you withdraw it at retirement. So-called "double taxation" is meaningless distinction without a difference.
@@alrocky it’s still double taxed, because you’re paying it back with taxed money and get taxed when it’s withdrawn, and you’re taxed on the interest you paid too, which is double taxed. But Americans get taxed double and triple times on their money across the board anyways. Taxes are ubiquitous. Max out your Roth IRA annually. In fact, take a 7,000.00 loan from your 401k every January, plop it into the Roth IRA, then pay that back through that year, wash rinse repeat
Is it worth taking out the 401K loan to pay the IRS?
That’s what I’m doing, it’s easier to do that than set up a payment plan with the IRS and go pay it every month
I would have to be in one hell of a hole to borrow from my 401k
What happens if you get fire before paying back 401k loan?
The loan immediately becomes due and they will use your existing 401k to pay it back as if it you withdrew it. Meaning you will incur the penalty from withdrawing it before retirement and taxed as well.
so assuming your plan allows for contributions during the loan period, if you make personal contributions on top of your loan payments it seems like you come out exactly the same as if you didnt take the loan out after 5 years. This means the 25k of the loan was pure profit and if invested correctly, could even have lead to more growth?
The con you mention is most people don't make those personal contributions to their 401k on top of loan payments.. but if your 401k contributions come straight out of your paycheck before it hits your bank account, youre guaranteed to be making those contributions, so it sounds like a win win to me?
Am i missing something? I'm about to take a a 401k loan myself and just want to make sure I take full advantage and do it right.
When your money is in the market, it makes money, and don't forget to account for the power compounding growth. When you take out that 25k, it's no longer leading toward tax-deferred growth.
"This means the 25k of the loan was pure profit" there is no pure profit from taking a 401(k) loan
Can you still contribute to your 401k while paying back loan balance?
@@jeffwhite3021 yes
yes
You forgot to mention the roth 5 year rule when withdrawing the contributions
Interrupting compounding tax deferred growth is a automatic NO-NO....
Agreed