401K and financing

[HELPDESKGUY]

For those of you who have a 401K.

Most 401K plans allow you to borrow 50% of what you have banked so far...

Rules:
1. You must still be employed with the employer
2. You must pay it back to yourself within 5 years at 6.5%(you are paying yourself intrest)
3. If you lose your job you have 90 days to pay it off or you will be charged a 20% penalty.

just an option...

 

[BeachBaby310]

Good idea! That way I would be paying the interest to myself.

 

[Mike]

Good idea if we go through a bear market ..... bad idea if we go through a bull market. I learned this lesson about 10 years ago. I borrowed from my 401K for a car loan to purchase a Ford Taurus ..... I went on to refer to that car as my Ferari for what it truly cost me That 6.5% can either look like a good steady return or a fraction of what could have been.

 

[Figment2]

I'm not sure if the original post was supposed to be a response to another post. BUT, many plans have a minimum loan amount (i.e., $1,000) and the most you can borrow is $50,000.
Some allow only one loan at a time (and there are IRS rules on refinancing. It's a formula that drives me crazy).

Also check with your plan administrator on your interest rate. Some are prime, prime plus one, or prime plus two, etc.

If you lose your job, the balance of the loan has to be declared as oridinary income on your tax return plus a 10% penalty (if you are under 59-1/2). The 20% is mandatory withholding sent to the IRS (to partially pay the attributable income tax) . If you are in the 38% tax bracket, you will pay that percentage on the distributed amount plus the 10% penalty if you are under age 59-1/2. Also some States tax retirement income which this is considered.

C.

 

[spiceycat]

this is not considered a mortgage by IRS - so you can't write these interest payments off.

 

[sagwanamu]

And if you change job, you need to pay up or 10% penalty plus tax. It can be very hefty....

 

[AMcaptured]

Sorry but only in extremely rare circumstances should anyone borrow from their 401K's, especially not for DVC.

JMO, People should not consider their 401K, Traditional or Roth IRA money as accessible.

Forget it exists until you are at least 60 years old.


Heidi

 

[raidermatt]

Sorry but only in extremely rare circumstances should anyone borrow from their 401K's, especially not for DVC.

I agree. I would never do this for DVC. Just not worth the risk to your future.

We did borrow from our 401K to help with the purchase of our house. We felt that was justified as we needed the cash to pull off the purchase, and we view our house as an investment more reliable than the stock market. But DVC (or any timeshare for that matter) is another matter.

We actually got quite lucky, as we took the loans in late 1999. So while the remainder of our 401k was taking a beating, the money we took out was increasing in value through our house.

I wish I could claim to be a financial genius who saw the stock market decline coming, but really, it was just fortunate timing.

 

[ColoradoBelle1]

Hi...
Hmmm some financial geniuses here...especially Figment!
So I have a question: thinking of purchasing in the name of my not yet formed LLC....to prevent X or divorce related creditors from stealing my wonderful DVC!!!!!

Anybody know if an asset search would show up a personal (in my name) purchase of a DVC in Florida?

I know this is a way out there question, but since I havent' started my LLC yet and since the points might not be there for much longer....I am willing to risk buying it in my name if the chances of X's lawyer finding it in an asset search are low. If I put the DVC in my and my adult daughter's name, will this help or just confuse the issue if I ever had to sell?

Thanks !
Colorado Belle

 

[Sarahsal]

Your retirement is more important than DVC. Borrowing to buy a house, pay for an education or another necessity is one thing, but a luxury? IMHO I would think long and hard before taking this step.

 

[Alexander]

Your retirement is more important than DVC. Borrowing to buy a house, pay for an education or another necessity is one thing, but a luxury? IMHO I would think long and hard before taking this step.

I do recognize these as opinions, but we have watched far too many people live only a very short number of years after retirement. We decided long ago that life is too short to let opportunities pass us by. We do borrow from our retirement plan because as my dad always said, "you can't take it with you!" Besides then when we do retire, our vacations with DVC are already paid for! Just MHO and another way to look at it.

 

[sarhenty]

We used a tiny percentage from our 401k to finance our DVC Purchase. We took out a two year loan and in the event we need to pay whatever is left of the entire amount, we have money in savings to cover that. So why didn't we just use our savings? We just didn't want to dish out that much in one shot and paying interest to ourselves sounded appealing. JMHO

 

[smjj]

If you borrow from your 401K you are repaying the money with post tax(taxed) money. That means when you finally do start using the money, you are paying a tax on the repayed money again. Remember, when you put money into a 401K it is pre-taxed(not taxed). That money is then taxed when it is withdrawn at your retirement....smjj

 

[manning]

I do recognize these as opinions, but we have watched far too many people live only a very short number of years after retirement. We decided long ago that life is too short to let opportunities pass us by. We do borrow from our retirement plan because as my dad always said, "you can't take it with you!" Besides then when we do retire, our vacations with DVC are already paid for! Just MHO and another way to look at it.

That's rationalizing!! Nobody knows when they will die. Yes you can die soon. HOWEVER, you can live to be 100!!! Far more are living well into old age than those that don't. That's one reason social security is getting into trouble! It has been shown the older you get the better your chances are of living longer.

Any responsible financial planner will strongly advise against borrowing from your 401-k unless it is for something critical and only if you have no other choice!!!

my dad always said, "you can't take it with you!

I like my dad's saying better. "Stay as debt free as you can and live within your means!"

 

[manning]

If you borrow from your 401K you are repaying the money with post tax(taxed) money. That means when you finally do start using the money, you are paying a tax on the repayed money again. Remember, when you put money into a 401K it is pre-taxed(not taxed). That money is then taxed when it is withdrawn at your retirement....smjj

Very good point!!

 

[CarolMN]

I do recognize these as opinions, but we have watched far too many people live only a very short number of years after retirement. We decided long ago that life is too short to let opportunities pass us by. We do borrow from our retirement plan because as my dad always said, "you can't take it with you!" Besides then when we do retire, our vacations with DVC are already paid for! Just MHO and another way to look at it.

How do you know you will only live a "very short number of years" after retirement? Most people don't plan to die young. I hope all the "eat, drink & be merry" people don't expect the rest of us to take care of them when they outlive their retirement savings!

Just MHO (and I don't expect to change your mind. We apparently value different things):

Borrowing from retirement funds is a risky proposition. To do it to finance a timeshare (even if it is DVC) is wrong.

Best wishes -

 

[Alexander]

DH and I both have very good retirement plans where we work. The money in our 401K is above and beyond what we will receive from our pensions. It is a savings account for the future. When we retire our pensions will be more than enough to live on and our 401K will be for extras.

We are not "eat, drink, and be merry" people. We live within our means, and if we want to purchase something, we purchase it. We have numerous assets that can be sold if we ever encountered a situation where the rest of the world was going to have to "take care of us."

Only a portion of the money we put into our 401K is pretaxes. There is a percentage limit, I'm not sure exactly what it is, but we exceed that and put more in each week, therefore not all of the money you put into your retirement savings is pre-tax.

We did not use our retirement savings to fund our DVC purchase....I only suggested that it is available for people to use is they see fit.

Although different people value different things, I'm quite offended that people think that it's so bad to borrow from your retirement savings. I think I'm done with this thread, as I only offered my opinion and didn't plan on getting flamed for it. I really don't like the accusational tone coming through here.

 

[jmminarik]

I think I'm done with this thread, as I only offered my opinion and didn't plan on getting flamed for it. I really don't like the accusational tone coming through here.

Taking your ball and going home?

I don't know why you're offended since you defended your position based on your situation. Most of us aren't lucky enough to have a pension (that is probably insured by every US tax payer), so for most people, borrowing against a retirement plan generally falls into the 'not such a great idea' catagory.

And I agree with Carol. The ants shouldn't have to feed the grasshoppers in winter.

-Joe

 

[manning]

Alexander-- Hopefully your retirement plan remains. Only two things can happen to make it disappear..... the plan is discontinued or the company underfunds it.

Like they say, there are only two things in life that's a sure thing. And all of us don't like those!!!

And why so touchy?? I have posted replies/ threads and have had responses not in agreement with my views. Many times their views would get me thinking and at times change my views. Sometimes (not many) I may change theirs.

Hang in there!!!

 

[kathleena]

Sorry but only in extremely rare circumstances should anyone borrow from their 401K's, especially not for DVC.

JMO, People should not consider their 401K, Traditional or Roth IRA money as accessible.

Forget it exists until you are at least 60 years old.


Heidi

I agree - bad idea!