Borrowing from my 401K, Good or Bad Idea?

I was thinking about getting a replacement BMW in a year or two and was wondering if borrowing from my 401K may be a good idea? From savings a cash purchase of BMW would be possible, but I choose a loan.

Assumptions:
My finances are in good order, reasonable savings only debt is mortgage and note for the BMW. I should have no problem getting a regular loan for the bimmer.

Really I do not know much about borrowing from my 401K, I just heard that if I do… I pay interest to myself and paying interest to my self vs. the bank seems like a good idea. I think that the borrowed money is withdrawn from 401K account so it is no longer compounding for me?

Let’s say for me I have $40K of my 401K invested in a government money market fund that is earning 4%. If I withdraw that as a loan to myself for the bimmer and my loan to myself is 6%, then am I really coming out 2% ahead?

Really depends on what the market does.....in general, I think it's not a good idea.

bad idea. If its for a house maybe, but otherwise no

Originally posted by LSB
Really depends on what the market does.....in general, I think it's not a good idea.

hmmm.... So if I could earn more by keeping it invested in the 401K, than the % of the loan then keep it invested?

To keep things balanced I plan to always have some low earning stable investments in the 401K, so the loan % would almost always be higher than these.

Depends what % you borrow, what the market is doing in your investments, and what the payback interest into your account is.

I paid cash for my car, in a sense.

1/2 of it from selling off Microsoft (ironically, during its "peak" sale price last year) and the other half was about 12% of my Voluntary Investment Plan *worth*...the interest rate is 6%, which is payed back into the plan, back into my account...the market share in this particular portfolio has avg. about 8% return in the last 2 years, so I'm only losing about 2%. Works for me, and I own my car outright with a clear title.

Here's what you need to do, and it might be a bit tricky...

First of all, if you're buying NEW and not and X5 or the new Z4, do European Delivery. Make sure one of your credit card has frequent flyer miles, or ask your dealer if you can make multiple credit card payments for the ED vehicle, or spread it out across multiple credit cards. Use the earned frequent flyer mile to fly to Europe to pick up the car.

Apply for a Home Equity Line of Credit, max it out to 30 year duration and use that to pay off the charge cards as soon as possible. Pay the maximum your budget allows or budget it so that you can pay it off in a few years. I think most HELOC has a pre-payment penalty but that will expire in 12 months or something.

This way, you get the maximum discount on ED, your flight is free and may even get to stay a few days (some ff miles can be used with conjunction with hotel stays), the interest on the Home Equity Line of Credit is tax deductible and the payment amount is flexible, and you don't get saddled with the high finance rates of bank auto loans.

Someone on the M3 board on .org actually was doing this. I'm planning to do this for MY next car (unfortunately it'll probably be a car build here in the states).

Originally posted by CD-55


hmmm.... So if I could earn more by keeping it invested in the 401K, than the % of the loan then keep it invested?

To keep things balanced I plan to always have some low earning stable investments in the 401K, so the loan % would almost always be higher than these.

I would say yes....I'm sure that TD or the other guys can come up with a more concrete example of why to keep it in the 401(k).

I think you get hit with a double whammy, in that the interest you pay (even though it is to yourself) costs you, and also the lost opportunity cost of possibly earning 4% return on your government fund.

I usually think it is a good idea. But you have to follow the rules carefully. TD may know this better than I, but it seems that the loan has to be repaid within five years, and there is formula that you have to use in order to determine the maximum amount that you can borrow.

Otherwise, you may find yourself paying income taxes as a distribution.

You may find this article helpful:

http://www.businessweek.com/magazine...8/b3791111.htm

If:

1) market is doing poorly
-and-
2) You will pay back the loan amount before the market is doing well again

then, yes, borrowing from your 401k is "OK".

At least you're paying yourself the interest, not some bank. The only thing you're out is the ability to earn interest on the money you borrowed. It will snowball, though, because the money you would've made on the money you didn't borrow will also earn interest until you retire. Wow, that statement was confusing...

Originally posted by ff
If:

1) market is doing poorly
-and-
2) You will pay back the loan amount before the market is doing well again

then, yes, borrowing from your 401k is "OK".

At least you're paying yourself the interest, not some bank. The only thing you're out is the ability to earn interest on the money you borrowed. It will snowball, though, because the money you would've made on the money you didn't borrow will also earn interest until you retire. Wow, that statement was confusing...

Yeah, that was basically my post above...and you know what? I've actually MADE money in the last 6 months via the VIP loan, LOL!!! WOuld have lost it had that 12% been invested...of course, that's assuming I pulled it out, which I can't until 59 1/2.

Originally posted by Ripsnort


Yeah, that was basically my post above...and you know what? I've actually MADE money in the last 6 months via the VIP loan, LOL!!! WOuld have lost it had that 12% been invested...of course, that's assuming I pulled it out, which I can't until 59 1/2.

You can start drawing on it next week, huh?

I guess I should've read the other posts first. Sometimes I'm too lazy.

Originally posted by ff



You can start drawing on it next week, huh?

LOL! Don't bury me yet!~

No, your post spelled it out clearly, I was just concurring.

Originally posted by Ripsnort


LOL! Don't bury me yet!~

No, your post spelled it out clearly, I was just concurring.

Shoot, I jumped the gun. I wonder if Jimmy's House of Coffins takes returns?

Are you going to go with the M3?

Originally posted by LSB

I think you get hit with a double whammy, in that the interest you pay (even though it is to yourself) costs you, and also the lost opportunity cost of possibly earning 4% return on your government fund.

What does the interest on a 401k loan cost him vs a conventional bank loan (assuming the same rate)?

$40k for 60months at 6% makes for a payment of ~$775/mo, with total payments equalling $46,400. $40k sitting in a 401k earning 4% year will be $48,700 after 60 months. Where it gets fun is the next step...

Making payments of $775/mo back into the 401k for 60 months, which then earns 4% will total about $52,500 after 60 months.

I've never explored 401k loans before and I am math disabled, so someone should check these figures

Originally posted by Clyde@work


What does the interest on a 401k loan cost him vs a conventional bank loan (assuming the same rate)?

I've never explored 401k loans before and I am math disabled, so someone should check these figures

Yes I think the rates should be about the same.

I have not yet done the math, but I think you forgot to include that as you pay back the 401K loan... that payment is now back in the 401K earning interest?

Originally posted by CD-55

but I think you forgot to include that as you pay back the 401K loan... that payment is now back in the 401K earning interest?

Making payments of $775/mo back into the 401k for 60 months, which then earns 4% will total about $52,500 after 60 months.

Did I forget? Or just word it poorly?

edit:
I did word it poorly. That should have been that the combination of payments and interest earned after being back in the 401k will total $52,500

Originally posted by JST
Are you going to go with the M3?

At this point in time... I do not think the extra $$$$ for the M3 is worth it to me. I am considering another E46 maybe with 4-doors. Features I would hope to gain that I don't already have may include: NAV, new warrenty, new car smell, and SSG.

Originally posted by Clyde@work




Did I forget? Or just word it poorly?

edit:
I did word it poorly. That should have been that the combination of payments and interest earned after being back in the 401k will total $52,500

Oh yeah my bad. So with the 401K loan the bank gets $0 and my 401K becomes $52,500. Sounds cool. My loan calculator is at home, so I will check later.

Thanks!

Originally posted by CD-55


Oh yeah my bad. So with the 401K loan the bank gets $0 and my 401K becomes $52,500. Sounds cool. My loan calculator is at home, so I will check later.

Thanks!

Just make sure you don't quit or are terminated before the loan repayment. Otherwise, (1) you have to repay the loan inmediately, or (2) your company will cash your bonds/stocks for repayment. I think.

Originally posted by CD-55


Oh yeah my bad. So with the 401K loan the bank gets $0 and my 401K becomes $52,500. Sounds cool. My loan calculator is at home, so I will check later.

Thanks!

Don't take my word for it...seriously, I suck at math. For reference, I used the calculators from www.dinkytown.net

Originally posted by DaveN323i


Just make sure you don't quit or are terminated before the loan repayment. Otherwise, (1) you have to repay the loan inmediately, or (2) your company will cash your bonds/stocks for repayment. I think.

This is one of the potential risks. Now that I work for the Man, I'm not thinking baout things like that so much any more Of course, the HR woman that was supposed to process my crap when I started last month forgot to set up my TSP contribution and also forgot to enroll me in my health plan. At least I can make up my missing contributions when it gets settled, and the govn't will make up some of the lost earnings (on their missing matching contributions, but not mine) and my health plan enrollment is effective retroactively (daughter had her four month old series of shots yesterday). Govn't workers...sigh. Oh wait...I resemble that last comment

http://media.kiplinger.com/servlets/Loan401k


Punch some numbers in here. Unfortunately, the lowest return % is 8%

Originally posted by LSB
http://media.kiplinger.com/servlets/Loan401k


Punch some numbers in here. Unfortunately, the lowest return % is 8%

The Cost of Borrowing from Your 401(k)
Here are your results:

What happens to your balance if you don't borrow?

Starting 401(k) balance:
$100000.00

Monthly contributions:
(including any employer match)
$500.00

Estimated annual rate of return:
8.00%

Balance after 60 months:
$185967.92


What happens to your balance if you do borrow?

Starting 401(k) balance:
$100000.00

Loan amount:
$40000.00

Interest rate:
8.00%

Loan period:
60 months

Monthly loan payments:
$811.05

Additonal monthly contributions:
(including any employer match)
$0.00

Estimated annual rate of return:
8.00%

Balance after 60 months:
$149381.86

Loss when the loan has been repaid:*
- $36586.05

Loss 10 years after loan is repaid:
- $117793.94

Loss 20 years after loan is repaid:
- $216838.35

Loss 30 years after loan is repaid:
- $436681.30

*This is the difference between what your balance would have been after 60 months if you had continued contributing and hadn't borrowed, versus what your balance would be after repaying the loan. The remaining loss figures indicate the amount of compounding you will have lost on your 401(k) earnings after each of their respective periods.

Another potential problem: If you quit your job