Have you ever taken a loan out of your 401 k

[gator75]

I read today on msn that 30 percent of 401 k holders have taken a loan out within the last year. We have a 401 but haven't taken a loan so tell me have any of you ever done this?

 

[NYEmomma]

I read today on msn that 30 percent of 401 k holders have taken a loan out within the last year. We have a 401 but haven't taken a loan so tell me have any of you ever done this?

Holy cow that's a LOT of people.

Loans against your 401k, in almost all instances, are a horrible, horrible, horrible idea.

There's also, in most if not all instances, restrictions on reasons for taking a loan. Last company I worked for, there were only 4 reasons you could take a loan out (school expenses, purchasing a home, 2 others that I forget). Also, if you were to ever leave the company, the loan would have been due back in full.

 

[Mickeyluver37]

This is ALWAYS a bad idea. I've known people that have actually done it for CAR loans because they are of the mind that you are "paying yourself interest." HORRIBLE Logic. I would have to seriously be about to lose my house or life to consider this.

 

[disneychic2]

It may be a horrible idea, but DH and I did exactly that many years ago when we had two college tuitions and a wedding to pay for all at once. (three different kids) There was no question about paying it back since it is set up to come out automatically. I think we only borrowed about 3k, just to cover the shortfall for the unexpected wedding. The loan was paid off fairly quickly. This was many years ago. I'm not advocating, just saying we chose that route.

 

[miztressuz]

i haven't as i have, in relative terms, nothing in it. but my mom has done on several occasions and I would say it depends on how well it is managed. in her company you could only have 2 loans out at a time and each loan could only be 50% of the available balance at the time. it had to be paid back within a certain time period (which i think she got to pick up to a maximum # of years) and you paid yourself interest. so the only thing you 'lost' was if your portfolio did better than the fixed interest rate you paid yourself back with. her's was even flexible if you no longer worked there i think you could still make arrangements for the payments, rather than a lump sum. but that's rare. for her it was a win. so i can totally see the 30%, as i imagine there are some good companies out there that make it a viable option.

it's not something i'd recommend doing close to retirement with the current economy, but if you have the time to 'repair' it if something goes wrong and the terms are good - i'd much rather pay myself interest then send that money to a bank.

 

[bdcp]

No, we haven't and we won't. There's very few good reasons to do anything that lowers the principle which is what you do when you borrow your own money. Our financial planner has said one of the only really good reasons to would be in the case of losing our jobs and needing it to live and keep our home. But, even then we have multiple investments that we could structure our use of in such a way to not affect our long term goals. We would not touch our 401K's but in a true emergency, we have IRA's and other investments we could use.

There are restrictions on borrowing against your 401K also.

 

[gator75]

I agree 30 percent is alot of people. I also wouldnt do it because in todays econcomy a job can be here today gone tommorw and then what? I think that once you do it its to easy to keep putting your hands into.

 

[disneyfreakk]

Even though it is a bad idea, I have taken out a 401k loan.

 

[PatsMom]

It is not always a bad idea. Like any other debt, it has to be considered in light of your overall financial picture. One big risk in this economy is that if you are laid off and cannot repay the loan, it becomes a taxable distribution subject to tax and penalty.

Taking out a loan means that your maximum rate of return for that money is equal to the interest rate on the loan. You reduce the amount that is earning a potentially higher return in a diversified portfolio. Also, depending on the rules for your plan, you may be limited on contributions until the loan is repaid which might mean losing company matching money.

It is certainly not something that you should consider for your first source of funds!

 

[Natalie's Mommy]

we did when we first got married. the program we were going to use for the donwpayment expired before we could get to closing (because the sellers dragged their feet) and we needed money for closing or we were going to lose the house so we took out a loan on my husband's 401k for that. we paid it off quickly and i don't regret doing it then, but now that we have money elsewhere and are more stable i wouldn't do it at this point in my life unless i needed the money to live off.

 

[Marionnette]

My sister took one out when her daughter started college a couple of years ago. My niece has a late-September birthday and could not sign student loan papers until she turned 18. My brother-in-law refused to cosign any of the kids' student loans. Once my niece was able to take out her own loan and had the money in hand, she paid my sister back.

Not always a horrible idea all of the time.

 

[Karenj2]

We've done it twice - once during a financial hardship, where we actually closed the 401k and had to deal with the penalties, etc. My hubby still hates that we had to do that. (We needed the cash fast, and had no other source.)

The second time was a loan from my 401k so that we could pay for our infertility treatments. At the time, the economy was doing so poorly, traditional loans were nearly impossible to get, and all of the "calculators" that show you how bad it is to take money out of your 401k actually showed that it wasn't that bad of a decision! Of course, the market started rebounding before we had repaid our loan, but IMHO it was worth it because I now have a beautiful daughter! We've already paid back the loan (faster than necessary) because we didn't want that hanging over our heads.

I wouldn't do it again.

 

[Pakey]

I'm the plan administrator for our company's 401k and I chose not to allow this option when we did start up on the plan back in the 90s.

I'd say that over half of the employees have asked though.

 

[si-am]

I cashed out a 401k once, but I desperately needed it for moving expenses (for new job in another city) and I had only been working there 2 years, so it wasn't a huge loss.

I currently have a 403b instead of a 401k and I am not allowed to touch that thing until I retire. In a way that's good because I won't be tempted, but it would be nice to have the option for an emergency.

 

[clh2]

One of the main problems with taking a loan out from your 401K or your 403B is: If you take a loan out for $100,000; you'll need to earn about ~$130,000 to pay back the $100,000. You pay yourself back "after" you've paid your state and federal taxes.

So - the "penalty" for doing this is about 30%.

It is late tonight...I hope this makes sense.

I do know someone who did this, to essentially do a "bridge" loan on real estate - for a very short period of time. It worked out great for this person - as he had the money to pay back the load in about 3 weeks. And, since he wasn't using his current income to pay the loan pack - it worked out OK for him. (He had wanted to purchase a piece of property that a bank was forclosing - the bank made him a very sweet deal IF he would close on the property before the end of the fiscal year.) The house they were selling wasn't closing for about 3 weeks later.

 

[QVCshopper]

One of the main problems with taking a loan out from your 401K or your 403B is: If you take a loan out for $100,000; you'll need to earn about ~$130,000 to pay back the $100,000. You pay yourself back "after" you've paid your state and federal taxes.

So - the "penalty" for doing this is 30%.

Thank you for saying this; I don't think everyone understands the main problem. Besides the possibility of losing you job and owing penalties and/or missing out on the market, you are repaying the pretax loan with after tax dollars. I used to write about this stuff for a major mutual fund company. It's best to leave as is, unless an awful, horrible situation comes up.

 

[TnTWalter]

according to many experts...
things to consider before you borrow from your 401k:

•Repayment. For most 401k loans, repayment plans range from one to five years. Loan payments are automatically deducted from your paycheck.
•The loan is not tax deductible. Some argue in fact that you inccur more taxes on the interest.
•Diminishing compounding. Compounding interest is one of the greatest assets when investing for retirement. Over time, the interest and gains on the money in your 401k can accumulate significantly. When you pull money out of that account, you reduce the amount available for compounding. Though you repay the loan with interest, it doesn't necessarily make up for the time lost when the money is outside your account.
•Leaving your employer. If you leave your job or your employer lets you go before your loan is repaid, the outstanding balance after a certain period (generally 60 days) is considered a distribution. Distributions are subject to taxes, and a 10 percent early withdrawal penalty may apply if you're under age 59 1/2. In some circumstances, your distribution may qualify as a hardship withdrawal and would not be subject to the early withdrawal penalty. Ask your advisor for tax information on any distributions from your retirement plan account.


unless you are facing financial hardship and certainly never to buy a car you shouldn't touch your 401k.

 

[DawnM]

We don't even think of it as an option. That loan cost way too much! A conventional loan would be better.

This is why I am working HARD to get 12 months of living expenses into savings.

Right now we only have about 6 months' worth.

Dawn

 

[lisaross]

i have don't even remember how much maybe 5,000?? well over 10 years ago...when we bought our house

I read today on msn that 30 percent of 401 k holders have taken a loan out within the last year. We have a 401 but haven't taken a loan so tell me have any of you ever done this?

 

[MrsPete]

Borrowing against a 401K is always a bad, bad choice. It's better to get a personal loan or even to use a credit card. Unless you're really in a mess -- like something medical or losing your house -- AND you have no other options, this isn't a good choice.

When you borrow against a 401K your investment isn't appreciating value; thus, you're missing out on earning interest. Yes, you're paying back interest to yourself, but -- depending on the market -- it may not be as much as you could've been earning. Also, you're paying the loan back with taxed dollars, and then in the future when you take the 401K money out to use it in your retirement, you'll be taxed AGAIN. You can find detailed explainations /examples on the internet to show just how expensive this is.

I'm shocked that so many people have taken out such loans. It just proves that so many Americans 1) aren't financially saavy, and 2) will do anything to prevent cutting back /economizing today.