401K and financing

[pkgman]

One thing that evreybody needs to remember about federal rules on borrrowing from your 401(k). There are several basic rules which apply than your plan can be fairly liberal in applying for them. Or they can take a very strict view od the rules. I believe the big rules are home ownership and medical bills than other emergencies. Also, if you have other means than you are to legally use them first.

At my employer, a co-worker wanted to borrow money to cover a down payemnt has he moved from one house to another. Figured that he would save several hundred dollars on bridge loan interest of three weeks. The plan said he had other means to finance thhe amount. He appealed and lost. Afterwards, he files a complaint to federal government and lost again.

If your employer has liberal rules, take advantage of them. But remember it a retirement fund for age 59 1/2 and after for the most part.

 

[DrTomorrow]

[...] 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. [...]

Either Alexander mis-spoke, or I'm confused - and I'm willing to bet on the latter ; I didn't know that you could put after-tax dollars into a 401k. I know that you can with various IRAs, but every company I've worked for simply stops making deductions/deposits if I hit the maximum annual contribution. Learn something new every day.....

Hmmmm. Maybe it's not me after all. From www.irs.gov:

A section 401(k) plan is a type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pre–tax basis

Looked around a bit, didn't see anything about adding after-tax $$$ to 401k. Alexander, if you're still reading, care to enlighten me?

BTW, I believe that borrowing from retirement savings for anything less than a critical expense is a poor idea. And I'm not sure how old Alexander is, but I find it amusing that someone who's taking the "could die tomorrow" approach bought into SSR which expires in 2054.

 

[CarolMN]

Either Alexander mis-spoke, or I'm confused - and I'm willing to bet on the latter ; I didn't know that you could put after-tax dollars into a 401k. I know that you can with various IRAs, but every company I've worked for simply stops making deductions/deposits if I hit the maximum annual contribution. Learn something new every day.....

Hmmmm. Maybe it's not me after all. From www.irs.gov: Looked around a bit, didn't see anything about adding after-tax $$$ to 401k. Alexander, if you're still reading, care to enlighten me?

BTW, I believe that borrowing from retirement savings for anything less than a critical expense is a poor idea. And I'm not sure how old Alexander is, but I find it amusing that someone who's taking the "could die tomorrow" approach bought into SSR which expires in 2054.

Rules differe among plans. At my former employer, when our 401(k) contributions reached the max, they were converted to after tax contributions. When I retired and rolled my 401(k) to an IRA, I received two checks - the first for the amount of the pre-tax contributions plus the growth on both after tax and pre-tax contributions. The second check was essentially a return of my after tax contributions. Obviously, I could only roll over the first check. We did have the option of suspending contributions when we reached the max, but I elected not to do it.

FWIW, there are many variations of 401(k) plans and there are different rules depending upon what the employer who set it up wanted. (Of course, the differences still have to comply with IRS rules) For example, my employer's 401(k) plan did allow loans, but only for a small percentage of the vested amount and only for very narrow set of reasons. Financing a timeshare was not one of them.

Best wishes -

 

[Mike]

I've only worked for two companies but both plans allowed the option of saving either pre-tax or after-tax dollars. This option wa available at all times - not just when the max contribution was reached. When I left the first company and rolled the 401K into an IRA, my experience was exactly as CarolMN described.

 

[DrTomorrow]

Thanks, CarolMN and Mike - never had that experience before. Of course, if I'm spending after-tax $$$ (assuming it's not matched by employer) I'd rather have it in my own control (IRA) than in company's 401k. Still, never even knew that companies could offer that....

 

[WithFaith50]

I think the original post is a good one and as the poster said “an option”. Everyone’s financial situation is different (as are the various 401k plans). What may be right for one person may not be right for another. If this “option” would work for you…go for it…only you know your financial circumstances. If this option would not work for you…then don’t do it AND don’t automatically assume that it would be bad for everyone. I'm not saying don't post your reasoning as to why you think it's a bad OR good idea, let's just make sure we are not *speaking* in absolutes. For EXAMPLE, "This option would be bad for ME because..." versus "This option would be bad for me, therefore it's bad for everyone.." .

Also, I totally agree with 1) Life is too short to let opportunities pass you by and 2) You can’t take it with you. Does that mean I’m financially irresponsible…NO! Are holding those sentiments incompatible with "Stay as debt free as you can and live within your means!"…NO! Am I automatically going to outlive my retirement savings and expect the rest of you to take care of me just because I may hold a "eat, drink & be merry" philosophy…NO!

Alexander, I guess my post will take the “heat” from yours. If so, I’ll give them all the consideration they deserve... .

Best wishes

WithFaith50

 

[TheBeast]

Always interesting to see so many opinions on a subject, and can usually sense when the "flaming" concern will come out. I just take with a grain of salt - people are entitled to opinions whether I agree with them or not - even if they're "flaming" on purpose (and most probably aren't).

Here's another way of looking at "borrowing from your 401K". The maximum contribution limit (tax-free) this year is $14K. So unless you've been putting in the full amount allowed every year, you're already "borrowing from your 401K"!

Provided you pay back the loan, you are no worse off - the amount in your 401K will be the same at retirement. The true risk, as has been stated, is if you can't afford to pay off the loan if/when you leave your job. Everyone needs to decide they're confidence in their own financial stability (as with any other financial decision).

Point made was - this is an option. And anyone considering the option has gotten lot's of pro's and con's from this post to decide!!

TTFN

 

[manning]

There is a down side if your 401-k is in stocks and the market is on the upswing. Say you borrow at $100 a share and you are repaying on the up tick (104,106 107 a share). You are buying back the stocks at higher prices. You end up with less shares compared to if you didn't borrow. If the stocks pay dividends then less dividends are rolled back into your account. The idea is earning tax free and compounding. Compounding is powerful along with deferred tax. That's how people who start saving early end up with a biiig chuck of money at retirement.

I know someone who started saving in there 40s when 401-k's started, maxxed out the savings, never touched it and is now living in retirement on the dividends alone. It doesn't happen to everyone but it can be done. He said he never would have been able to do it if there was no 401-k.

 

[TheBeast]

See, I keep learning. What you said is true, and I think maximizing contributions and minimizing withdrawals is key.

So keep buying more DVC, don't go on vacation, and you'll always have plenty of points!!!

 

[crisi]

I do recognize these as opinions, but we have watched far too many people live only a very short number of years after retirement.

It is an option, but I've watched far too many people retire beleiving they can live decently on social security, without savings or pension plans, and have been disappointed in the lifestyle social security provides. Everyone needs to evaluate their financial situation - if I had a great pension plan and no intention of living long past retirement nor any desire to leave anything behind for my kids I'm not sure I'd bother with 401k's at all - might as well spend it now! But in our case we don't have pensions, I come from an unfortunately long lived family (unfortunate only that I need to plan for green fees at 83 ), and it would be nice to leave something behind for my kids or grandkids.

For most people its probably good advice not to touch your 401k unless you really really need to.