Need some 401K advice please.

[Christine]

OP, explore ALL other loan options before doing this. Especially right now. This is a prime time to stay in the market and take advantage of the buying opportunity of a dip. The money in your 401k will grow FAR more over time than you think.

As a rough example, if you take a $10k loan and it takes you 5 years to pay it back, 30 years from now you will have LOST approximately $60,000 vs if you had just left that money in there to grow. This is the opportunity cost of that $10k.

I don't know your situation or your credit score or any of that, BUT lately credit cards have begun offering personal loans at competitive rates using your credit line. I have been given offers from all my cards for loans up to my credit limit at anywhere between 5.9 and 6.5% fixed interest, depending on the length of the loan chosen. If you have unused credit lines, look into this before tapping your 401k.

Glad you spelled this out. Many people think that if they take a loan out and pay themselves back with interest, what have they really lost. Well, you nailed it. Lost opportunity. The $10K that was missing for X amount of time did not earn anything so there is a loss, but it's so invisible it's a loss most people just deal with and don't lose any sleep over it.

 

[QueenIsabella]

Keep in mind that if there’s a set amount of money you need, (say $15,000 to pay off a medical debt) to get $15k you’d have to withdraw $15k + the amount you’ll owe in taxes + 10% early withdrawal penalty. If you take a loan, you only need to take $15k out, leaving the rest to sit and earn.

You pay the interest back to yourself, but you will owe the amount if you leave your job early.

To expand on this, they typically take out 20% in taxes, on top of the 10% penalty, and an additional 5% for state taxes, if applicable. So, for the $15,000 example, you'd have to withdraw close to $25,000 to clear $15k. With a loan, you'd only have to take out the $15,000 plus enough to cover any fees involved.

 

[piccolopat]

I think we need to understand the reason behind OPs question before giving an answer. In general I agree that a 401k loan is better than a withdrawal but the danger is that it has to be paid back immediately if you leave or lose your job. If medical debt is involved, working out a payment plan might be a better choice. Under certain circumstances, bankruptcy might also be a choice. Usually a 401k is protected in a bankruptcy. Wishing the OP well.

 

[lifesavacation]

We took a loan out against my husband's 401K.

He did not pay taxes. He did have to pay back the loan with interest to himself.

Be prepared to have a short repayment window should you lose your job. That happened to my husband right when COVID hit. The job loss was totally unexpected and the 60 days to repay the loan was added stress.

We loaned the money to buy a commercial building. It was the best financial decision towards our retirement we've ever made. I know the advice is to never borrow from your 401K, but we now have a building that is fully leased and generates monthly income, and will be paid off in 15 years.

 

[GAN]

Glad you spelled this out. Many people think that if they take a loan out and pay themselves back with interest, what have they really lost. Well, you nailed it. Lost opportunity. The $10K that was missing for X amount of time did not earn anything so there is a loss, but it's so invisible it's a loss most people just deal with and don't lose any sleep over it.

Yes ....unless the market actually declines. If you're paying yourself 7% interest, that is better than many of the funds most companies offer even in good times. Check your returns over the last 5-years ...some probably aren't even 7% and that's during an unprecedented boom.

 

[GAN]

To expand on this, they typically take out 20% in taxes, on top of the 10% penalty, and an additional 5% for state taxes, if applicable. So, for the $15,000 example, you'd have to withdraw close to $25,000 to clear $15k. With a loan, you'd only have to take out the $15,000 plus enough to cover any fees involved.

BINGO! By withdrawing you gave away $10,000 that you *MAY NOT* have had to

 

[princesscinderella]

The first step is you need to see if a loan from your 401(k) is even an option, I administer the plan for our small business and we don’t allow loans as part of the plan to keep it simple.

I would also explore any other funding options if possible as the market is down right now and it the time to put money in not take it out. Best of luck in your decision.

 

[MrsPete]

I'm going to start off by saying..........."YES, I know it's not the best idea to dip into your 401K but sometimes desparate times call for desparate measures"

I hear you when you say "desperate measures", but you have other options. Ideas:
- Personal loan from the bank
- Get a new credit card with a 0% interest rate for at least a year -- hopefully things will be better by the time the 0% ends
- Get a second job for a time
- Do you have two cars? If so, sell one -- that makes a huge difference in your budget.
These are just ideas. Put serious thought into what might work for YOU.

So here are my questions.......IF I took out a loan, will the 10% fee and taxes be taken out of the 401K itself or do I need to come up with that amount out of my pocket. Secondly, if I were to leave the job before paying off the loan, my boss said that the remainder of the loan would be taken out of the remainder of my 401K. Is this correct?

Not all 401Ks are the same, but -- yes -- in general you can expect:
- A big fee -- 10% is probably about the truth.
- You haven't paid taxes on that money yet, so -- yes -- you'll pay taxes. Taxes might come out of the money you withdraw, or you might owe next April 15th, but you won't escape the taxes.
- That money will count as income for 2022, and it might push you into a higher tax bracket next April.
- While the money's out of your account, it isn't increasing /earning interest for your retirement. You've seen charts about "the cost" of waiting a year or two to start saving for retirement -- this would be kinda the same thing. The difference years from now when you retire could be significant.

To expand on this, they typically take out 20% in taxes, on top of the 10% penalty, and an additional 5% for state taxes, if applicable. So, for the $15,000 example, you'd have to withdraw close to $25,000 to clear $15k. With a loan, you'd only have to take out the $15,000 plus enough to cover any fees involved.

This sounds pretty realistic. Taking money out of a 401K early -- loan or not -- is an expensive proposition.

 

[floridafam]

Your 401k is likely handled by a third party administrator (Fidelity, etc) and none of your boss’s business.

 

[LuvOrlando]

Technically, a 401k administrator has a fiduciary responsibility to the plan’s PARTICIPANTS. Not the plan itself. As outlined by the Department of labor and the IRS.

OK, so lets make it binary. Do you mean the 401K advisors have a fiduciary responsibility to the aggregate active investors which means allegiance lies with the performance of the plan on behalf of those with money in the plan - OR. - do you mean 401K advisors have a fiduciary responsibility to each and every individual investor to the point that the individual investors best interests will be represented even if it is at a detriment to the aggregate plan?

 

[tvguy]

OK, so lets make it binary. Do you mean the 401K advisors have a fiduciary responsibility to the aggregate active investors which means allegiance lies with the performance of the plan on behalf of those with money in the plan - OR. - do you mean 401K advisors have a fiduciary responsibility to each and every individual investor to the point that the individual investors best interests will be represented even if it is at a detriment to the aggregate plan?

You didn't ask me, but I don't think the advisors that deal with the investors have any say in any of the investment options available in a plan, and THAT is what would determine the overall performance of a plan. That is all set up by the employer and the investment institution. At the advisor level, their fiduciary responsibility is to make sure investors know what the options, and risks of the investments offered in the plan are, and to make sure investors understand the consequences of withdrawals or loans.
The employer I retired from last year now automatically enrolls all employees in the 401k plan at a 4% contribution rate, which is the amount they match. You can opt out, but they had only a 30% participation rate when they required you to opt in. The action was taken to improve the performance of the plan.

 

[amylevan]

OK, so lets make it binary. Do you mean the 401K advisors have a fiduciary responsibility to the aggregate active investors which means allegiance lies with the performance of the plan on behalf of those with money in the plan - OR. - do you mean 401K advisors have a fiduciary responsibility to each and every individual investor to the point that the individual investors best interests will be represented even if it is at a detriment to the aggregate plan?

There are different 401(k) fiduciary responsibilities depending on who you are talking about. Assuming someone at your company serves as the 401(k) administrator, their fiduciary responsibility is to the plan participants and their beneficiaries. They do things like make sure plan costs are not too high, and as applies to this particular instance, ensure that the plan rules are followed. In this case you’re talking about a withdrawal, assuming before age 59 1/2, which would require meeting hardship definitions. You can’t just take money out of a 401(k) because you want to. The Plan administrator is responsible for making sure that you actually have a hardship, including potentially requireing paperwork to verify said hardship. Because the IRS says so.
In this case it has nothing to do with how it benefits the plan or even other participants, but how it enforces that you, the withdrawaler, meet IRS requirements. Thereby protecting protecting you, the individual, from accidentally doing something that you can’t.

As for your question here, again there are other people who can be involved in 401k management with ERISA fiduciary responsibilities to the success of the plan as a whole (making sure there are good and varied investment opportunities for one). They are interested in aggregate success.

 

[clh2]

I would try to exhaust any option than a 401k loan.

as I understand it, you take a loan, with pretax dollars. Yes, you get interest on the loan. But then arent You paying the loan back with money that is taxed? Going into an account that is taxable when you withdraw it in retirement?

 

[GAN]

I would try to exhaust any option than a 401k loan.

as I understand it, you take a loan, with pretax dollars. Yes, you get interest on the loan. But then arent You paying the loan back with money that is taxed? Going into an account that is taxable when you withdraw it in retirement?

Repaying the loan is with after-tax dollars…