OT - Borrowing from 401 K

[Leeshouldveflanked]

So I did very well the last 3-4 years on my 401k... but I am 53 years old and still will work another 6-10 years... if I want to borrow let’s say $30K from my 401K and pay off a Heloc, what are positives and negatives besides lost future growth on the $30K? I already paid off my original mortgage, so all I owe on house is the Heloc.

 

[wsjmsu75]

So I did very well the last 3-4 years on my 401k... but I am 53 years old and still will work another 6-10 years... if I want to borrow let’s say $30K from my 401K and pay off a Heloc, what are positives and negatives besides lost future growth on the $30K? I already paid off my original mortgage, so all I owe on house is the Heloc.

I am far from any kind of financial expert, but my quick answer would be that if you expect a return on the 30k that is significantly higher than the interest rate you are paying on the heloc, then don't do it. Otherwise, maybe so unless there are downsides to borrowing from a 401k that I am unaware of. I'm sure you will hear from people on here that know more than I do.

 

[dawgstudent]

Penalty of 10% plus taxes you have to pay. Is it worth it?

Nevermind - you said borrowing. What’s the interest rate?

 

[Mobile Bay]

Yep, and that is what happened to me. I needed just a tad of money early last year. So I borrowed 2k from one of my retirement accounts. It would be I guess 3-3.5k by now if I hadn't. Stupid tax paid on my part. Not the first time.

 

[archdog]

So I did very well the last 3-4 years on my 401k... but I am 53 years old and still will work another 6-10 years... if I want to borrow let’s say $30K from my 401K and pay off a Heloc, what are positives and negatives besides lost future growth on the $30K? I already paid off my original mortgage, so all I owe on house is the Heloc.

I did this to pay off wedding debt..... not the best thing to do. You miss on growth and you still have to pay it back. Lets assume it takes you 4 years to pay off that 30k you borrowed. If we assume average 5%-10% return on your money, you are essentially paying an APR equal to the missed return. I think you also miss the growth of the growth year in and out. So, not sure if I would do it. The money is there and earning for you already.

I guess it all boils down to what you believe your 401k is going to return versus the interest you are paying on the Heloc.

 

[o_Hot Rock]

I have done this 3 times: Once to buy a plane, once to buy a lake house get away and once to get out of credit card debt from my late wife’s battle to survive. That one was the first time, after she passed. I decided to live and do what I wanted.

The key to me was never stop contributing your normal amount and pay it back as quickly as you can. You are borrowing from yourself so the interest is paid back to yourself and your balance at retirement is still Ok.

Again, you still have to contribute your normal amount and in toon of that pay the payment back. I don’t think it’s a bad thing at all. I made it work for me.

 

[ronpolk]

I would imagine you could refinance that HELOC balance at a much lower rate than you’d return in the 401-k.

I’ve never heard anyone borrow against their 401-k and later say it was a good idea. I think that should purely be a last resort emergency option.

 

[o_Hot Rock]

One thing, it does depend on lots of other things. Credit card payoffs that have 25% interest... no brainer to do it.

Do you normally have your 401k in fixed interest? Then it’s not making anything anyway.

But if you have a great credit rating and your 401K money averages better than 8%. Then get the low interest loan elsewhere.

Lots and lots of things can change it to me.

 

[karlchilders.sixpack]

I'd do it

You have time to recover, and how else did you plan to pay off that HELoc? Sell your house.?

 

[missouridawg]

Check your life insurance plans, first. The ones I signed up for allow for us to borrow from them. I borrowed quite a bit out of them at 2% and 4% interest loans in 2019 to buy a business. However, lending rates now may beat that. I'm still amazed at how low our re-fi was late last year. We built on to our house, adding $80K to the loan, re-financed and lowered our monthly payment.

 

[Apoplectic_Objurgator]

I took a 401k loan at the market peak-
Luck not skill - and paid it at and much less. Worked out quite well for me.

 

[Cooterpoot]

Penalty of 10% plus taxes you have to pay. Is it worth it?

Nevermind - you said borrowing. What’s the interest rate?

Not if it's a loan. Loans are generally low interest. But, financial advisors will tell you not to do it.

 

[karlchilders.sixpack]

Finished paying off my house with mine

No more insurance,

but heck of a deal.

 

[Russ Wheeler]

You have a paid off house but you can’t find the money to pay off the HELOC? Something smells fishy about that.

 

[57stratdawg]

I don’t think paying down debt will make much sense over the next couple of years. I would take the returns and let some inflation be a tailwind.

 

[Mobile Bay]

I forget, and it doesn't matter. Because you pay that interest to yourself. What matters is it is WAY lower, by somewhere between 10-16 percent than what that money would have made in the market over this time frame.

 

[Leeshouldveflanked]

You have a paid off house but you can’t find the money to pay off the HELOC? Something smells fishy about that.

Nothing fishy... I just don’t like owing a bank.... if I borrow from a 401k, I owe myself.

 

[Mobile Bay]

I don’t think paying down debt will make much sense over the next couple of years. I would take the returns and let some inflation be a tailwind.

It just depends on where you are. Five years ago I was sending half of my paycheck to the bank to pay notes. I had to punt in terms of my career. And I went back to school to do it. Then Dad got worse and I had to care for him. So I took out all I could. So when I got out I was making a bunch more but most of it was obligated. So it was hard for me to even make the travel I had to do for work. Clearing all of that cruft out was the best thing I ever did. You will never sleep as well as you do in a paid for house.

 

[Russ Wheeler]

Nothing fishy... I just don’t like owing a bank.... if I borrow from a 401k, I owe myself.

Yeah I get it.....but can you not save enough from your income to pay off the HELOC? That way you avoid the penalties with the 401K. You have no house payment.

Dave Ramsey doesn’t even recommend you do this, by the way.

 

[paindonthurt_]

Let’s simplify this
Would you rather pay

$1400 year in interest borrowing $30k from bank
Or $2400 year interest borrowing from 401k

Approximately on the conservative side

 

[johnson86-1]

So I did very well the last 3-4 years on my 401k... but I am 53 years old and still will work another 6-10 years... if I want to borrow let’s say $30K from my 401K and pay off a Heloc, what are positives and negatives besides lost future growth on the $30K? I already paid off my original mortgage, so all I owe on house is the Heloc.

A couple of reasons not to do it that haven’t been mentioned yet.

I think you get double taxed on the interest you pay yourself. You pay it back with after tax dollars, and then get taxed when you withdraw it. Not a huge deal, but every little bit helps.

It exposes you to risk of penalties. If you lose your job, you have to pay it back pretty quickly to avoid penalties.

Also, if you do it, make sure your plan doesn’t prohibit normal contributions until it’s paid back. Don’t think many plans do this anymore. But if it does, you could miss out on a match if you get one.

Iwould not take the risk to get rid of a HELOC unless I was going to lose my house otherwise. Would maybe consider it to pay off credit card debt, if the credit card debt was caused by some random setback and not due to overspending.

 

[Jeffreauxdawg]

Just throwing this out there.... At your age you should have some kind of fixed income (bonds) exposure in your retirement portfolio. Whether it's 20% or 50% I don't know. Any new money you are pumping into bonds today are going to give **** returns and will likely decline in price as rates eventually rise.

Unless you are completely in a target fund with no other options, you could keep your equity exposure the same and just borrow from the bond portion of your portfolio. IE if you have $300k total and are 70% equities 30% fixed income you have $210k in equities and $90k in fixed income. Borrow the 30k and rebalance to be at $210k equities and $60k fixed income.

Pay off your heloc and calculate the amount of interest you saved and how long it will take to catch up your portfolio. You will probably end up with a much better return because you are technically using pretax money to payoff an after tax bill at a higher interest rate than the current bond market is yielding.

Interest saved is interest earned.

 

[fishwater99]

Let’s simplify this
Would you rather pay

$1400 year in interest borrowing $30k from bank
Or $2400 year interest borrowing from 401k

Approximately on the conservative side

The 401(k) loan interest rates are usually lower than you can get from the bank. 4.25% is the rate on my plan right now.

You are just missing out on any market increase on whatever you loan is for, which could easily be more than the interest you were paying yourself back.
If the stock market goes down right after you take out the 401(k) loan then you are actually a winner.

 

[Cooterpoot]

Do like me. I'm selling my house for parts. I've seen the price of building supplies and can triple my money.

 

[57stratdawg]

It doesn’t sound like he’s struggling like you were. His house is paid off, this is just a LOC. Unless I’m at risk of losing the home (which seems unlikely), I’m not pulling my cash out of this environment with such cheap debt available.

 

[bulldogcountry1]

Which would give your greater peace of mind and help you sleep better at night? Do that.

 

[dawgoneyall]

So I did very well the last 3-4 years on my 401k... but I am 53 years old and still will work another 6-10 years... if I want to borrow let’s say $30K from my 401K and pay off a Heloc, what are positives and negatives besides lost future growth on the $30K? I already paid off my original mortgage, so all I owe on house is the Heloc.

No.

 

[o_Hot Rock]

I say people that saying yes or no without knowing the whole situation are wrong. Interest rates and your returns etc.

I always kept a portion of my 401K in safe places that weren’t making but 2-5% anyway. The rest in stocks.

Some say at 53 you should have 53% of you investments in safer stable areas. I don’t do that myself but I kept 20% or so and that is what I would borrow by rebalancing. You do you though.

If that Loan you have is not at a high rate, just pay it off as soon as you can and leave your 401k alone. But if it is a high interest rate, 401k can help you get it gone if other options aren’t there.

It can be used to your advantage depending on your options.

 

[greenbean.sixpack]

Just throwing this out there.... At your age you should have some kind of fixed income (bonds) exposure in your retirement portfolio. Whether it's 20% or 50% I don't know. Any new money you are pumping into bonds today are going to give **** returns and will likely decline in price as rates eventually rise.

I'm older than him (2 years til retirement) and have 0% in fixed income, I'm "all in" equities. In retirement, I'm not going to need 401k to live on, so i'll just ride out any downturn (if i don't jump out before the downturn). I wouldn't go to heavy in bonds, unless retirement is imminent and a 401k will be a major portion of monthly income.

 

[paindonthurt_]

Yes my elementary analysis was intended to point out lost income in the market.

You are correct on timing, but if I could time the market like that, I wouldn’t be working.

 

[Go Budaw]

Yeah I get it.....but can you not save enough from your income to pay off the HELOC? That way you avoid the penalties with the 401K. You have no house payment.

Dave Ramsey doesn’t even recommend you do this, by the way.

Depending on the term length and interest rate, the HELOC might be the same payment amount as a mortgage note P&I would be before the house was paid off. So while he may not have a mortgage payment, he very well may still have a “house payment” in the form of the HELOC.

 

[johnson86-1]

I'm older than him (2 years til retirement) and have 0% in fixed income, I'm "all in" equities. In retirement, I'm not going to need 401k to live on, so i'll just ride out any downturn (if i don't jump out before the downturn). I wouldn't go to heavy in bonds, unless retirement is imminent and a 401k will be a major portion of monthly income.

I think the low interest environment has made a lot of traditional rules of thumb on asset allocation obsolete. With interest rates so low, unless you can earn so much money that the returns you get are irrelevant, it's hard to generate the nest egg you need without a lot of stock exposure late into your career. If you can afford to save enough to hit your returns while following traditional asset allocation rules, then you probably have enough cushion that you can afford to go heavy on stock exposure and hope you hit your "number" early enough that if you have bear market near the time you could retire, it will still be early enough in your career that you can work a 3 to 4 more years to wait for recovery. If you look at the statistics on people that have to end their career earlier than they want to, that means you probably need to hit your number sometime around 55-58, depending on how concerned you are about being forced to quit earlier than expected, either because of health or job market conditions.

 

[mstateglfr]

I would rather deal with having to pay back Moose and Rocco than pull from my 401k to pay off something that isnt an emergency.
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[Seinfeld]

So I’ve done this a few times, and I see some decent pointers in this thread, but also some misleading assumptions. For example, this isn’t a simple interest rate A to interest rate B comparison because with a 401K loan, you’re paying yourself back. Not a bank. Second, yes... you’ll likely miss out on some market growth by pulling out of your 401K, but not for the full period. As soon as you finalize the loan, you’ll be making payments immediately back into your 401K which will complement normal contributions and grow just like them.

I don’t know what kind of interest rates, loan periods, etc we’re talking here, but I do know that 401K loans tend to be capped at 60-84 months. My gut tells me that your absolute best all-around financial option would be to simply make extra payments on your HELOC so that it can be paid in full in 5 years, thus avoiding a decent chunk of interest. That said, we’re probably splitting hairs by the time it’s all said and done, and like another poster said... we’re all acting like the market is gonna continue to surge. If it doesn’t, you could come out great by taking a 401K loan.

Only advice I have is go with the route that helps you sleep better at night, BUT know that there’s typically a $50K or similar cap to total 401K loans that can be pulled out, so I try to be real careful to only use it when it makes rock solid sense. You just never know when an emergency might pop up

 

[Jeffreauxdawg]

I don't know that I can argue with your opinion in current times, but in the not too distant future there will likely be a lengthy period of time where bonds outperform equities. Our opinions on bonds are often skewed by the returns we get by "buying" the dip when equity markets crash. That only works when you are still generating income and can dollar cost average.

During retirement, we generally aren't going to generate enough income to accumulate wealth and buy dips. The only way to preserve and grow wealth is to either time the market and sell equities before long term downtrends or diversify some of our portfolio into other asset classes that can be reallocated into equities during low valuations.

If 2 fellas retired on 1-1-2000 with equal amounts in their 401k and 1 guy was 100% S&P500 and the other was 100% Vanguard Long-term Bond Index Fund.... Bond guy murdered in returns for the first 13 years and still outperformed meaningfully during the 20 year period.

View attachment 20171

Historically, the asset classes with the least amount of correlation to equities are bonds and real estate. Bonds are usually more liquid and real estate is not only a good hedge against equities, but also against inflation.

I'm not a CFP or anything, but I study the markets both present and past. I'm not really a fan of the 60-40 stock/bond portfolio for most folks... Especially today with current rates and rising rates on the horizon. But it's also pretty tough to justify 100% equities today. Real Estate and even cash at 5-10-20% would be a wise move IMO. As expensive as real estate feels, equities are more expensive right now historically speaking.

FYI, I am a holistic portfolio guy. So if you are 100% equities in your 401K. Have a pension and social security payments giving you $2-3k a month in retirement (fixed income) and own a piece of property with a good amount of equity, you are well diversified in my book. So long as you are willing to sell the property if the time is right and live on the fixed income when necessary.... This sounds pretty close to where Greenbean is nearing his retirement and I am all for it if you have the discipline to not get emotional in the 401k piece if equities tank in a long term downtrend like 2000-2010.

 

[KentuckyDawg13]

^This^

 

[TrueMaroonGrind]

I have not explored a 401k loan, but I did find some useful calculators. Here is one from vanguard: https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementPlanLoanCalc.jsf

 

[maroonmania]

I am far from any kind of financial expert, but my quick answer would be that if you expect a return on the 30k that is significantly higher than the interest rate you are paying on the heloc, then don't do it. Otherwise, maybe so unless there are downsides to borrowing from a 401k that I am unaware of. I'm sure you will hear from people on here that know more than I do.

Problem is there is no way to really know what the market is going to do over the next few years while the money is out of the retirement account. I would say it depends on what kind of loan would have to be taken out if you didn't do the 401K loan. If its a personal loan or a college loan where you would be paying 7 to 9% or possibly more then the 401K loan is a pretty decent option. Whatever interest you pay on the 401K loan goes right back to you so there is really no cost there and how many years can you actually bank on retirement funds giving you better than 8 or 9 percent? Some years it could actually lose money so in that case you would win by pulling the money out.

 

[fishwater99]

I have not explored a 401k loan, but I did find some useful calculators. Here is one from vanguard: https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementPlanLoanCalc.jsf

This is a great tool.

 

[Go Budaw]

This is a great tool.

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