The Tax Benefits of Borrowing From Your 401k That No One Talks About

[higiniomorales]

I don't like doing this when it comes to investing in a regular brokerage account since you'll essentially be paying double taxes on the 401k money, once as you pay back the loan with post tax dollars and then again when you retire and start withdrawing.

Now what I like to do instead is takeout $6k, now $6500 and put all that loan money towards my yearly Roth IRA contribution and investing it in one lump sum. I got to fund my Roth with post tax money anyway, might as well use my 401k money which I can pay it back in a year.

[christopherbilkey]

During 1986 there was a one-time deal that if you had a 401K and had been employed at the company for 5 years you could pull it out penalty free and get a lower-than-normal tax rate on the money.
At that time, I barely qualified for all the conditions and emptied my $16, 000 401K and used the money for a down payment on a $91, 000 house. It turned out to have been a fantastic opportunity to buy a house for me and my family. Now as a retiree I am in a very secure financial position.

[July..]

I did the same thing many years ago to use as the down payment on a house. It worked out well that home has generally appreciated at the rate of inflation. Never would have saved that down payment back in the day this was the only way I could afford to enter the housing market at that time.👍

[bobatl]

In your example you have the $50, 000 from the loan proceeds earning interest at 5% but it doesn’t seem like you have considered where the $1043 per month is coming from and the foregone interest income on that money. Or alternatively have that $50, 000 diminished by the monthly payments.

[bertkramer]

Doesn't it cost $1, 200 for the monthly loan payment ($1043 +15% income tax)? A 401K is payed back is after taxes. That tax would cost $157 x 60 months = a cost of $9, 420 of taxes and then you pay taxes again when you pull it out..

[lindad]

worked for me. Paid off my mortgage with pre-crash dollars... lowered my interest rate and my payment, cut a decade off the mortgage, pay interest to myself and kept up with the contributions. What's not to love?

[algoflush]

If this person in the example pulling the money out of 401K in 1 swoop would incur a 10% early withdrawal fee under age 59 1/2. plus taxes The borrowed portion would not incur a 10% penalty. You did mention this at the 13:45 time stamp of video.

[jasonbroom]

All of this presumes that you WILL remain with that employer for the entire 5 year period of the payback. Something you completely ignored is company matching dollars, and interest accrued on such, in the first scenario. The only way you borrow from your 401(k) account is if you can afford to make the resulting payment without reducing your contribution rate in any way. At the very least, you really need to contribute enough get the full match from your employer. My wife and I did take out 401(k) loans on two different occasions and we were very glad each time we paid those loans off. Never again.

[robertd..]

This sounds good but what about the company match. I don’t think you would be getting it in the first example but you would be getting it in the second. Not sure if it would amount too much but something to look at. Lord knows 20 years ago I was getting loans from my 401K whenever I could. The only thing that saved me was a few terrible years of market returns. That money was not taking a dump and I was buying low when repaying my loans. I looked like a genius at the time. 😂

[greendreams]

Just looking at the 401k loan by itself (not compared to a personal loan) you are paying taxes on the 401k loan twice correct? Paying tax once on loan repayment via employee payroll deduction (this is a after tax payment). Then paying tax a second time at 401k distribution time. Or am I mistaken?

[cutehumor]

thinking if borrowing from my 401k in the year I retire. im allowed only a 50k max and my job doesnt require all of it to be paid back when i retire. just ach debit every month

[denny]

Josh, How come you never talk about self directed IRA's ? There are allot of things you can do with the "self directed IRA" that you can not do in a traditional IRA held at the standard brokerage account.

[dougb]

I did that several times. I borrowed from my 401k, paid my car loan in full, or used for high interest debt consolidation, and then paid myself back with interest. The payments seemed easier, and less of a burden, because they automatically came out of my paycheck. I never even knew I should consider tax ramifications.

[toddhallam]

This might be a great way to purchase the side by side ATV that I have been wanting.

[mikebraun]

Ya.... but that 9.25% goes back into YOUR

[gcburkett]

I would not borrow from the 401k to invest outside of the 401k. I don't see the value for the hazzle. I also know people are more like to spend from a brokerage account then from an IRA or 401k. You don't want to make it easier to spend.

[DavidDurst]

We did this to pay for our daughters wedding. Pulled the money out and repaid if over a few years and no harm no foul. Worked great and didn't even notice it gone.

[jamesflick]

You pay tax as income when you make the loan, you pay it back with after tax money, you pay taxes on the total as an RMD. Sounds silly to me. What am I missing?

[waterbottle]

Maybe in a pinch, but why not just contribute via roth . Unless you will need the money early I don't see the advantage personally. Still investing topic and video thanks

[ronloftis]

There are other benefits to borrowing from your 401k if you are near retirement with a stable job. We are all hearing talk of a recession around the corner. We don't know exactly that would mean to our 401k balances, but by taking a loan out you are taking money out the market and reducing market risk exposure and betting on yourself to pay back the loan. Then eith the payback of the loan what you are doing is basically dollar cost averaging back into your investments.