Should I pay off my 401(k) loan early?

[MantaRider]

Hey folks,

I have a 401(k) loan of a little under 10k that I had to take out last year to cover medical bills and moving expenses. It's currently being paid off $200 per month, and if I don't touch it otherwise will be paid in 2024. My question is this - should I save up to pay it off early, or put that money towards other things? I can't do it piecemeal, the plan only accepts full payments. I know that money will be earning me a lot more in a 401(k) than it would otherwise. But here's the thing - if I have 10k to use, would that be better put towards other goals?

We are currently working on building an emergency fund, we want to move to Florida from PA, and once we are in Florida, we want to finally stop renting and buy a house. If I can save up 10k, would it be better put towards these goals than the loan?

 

[StitchesGr8Fan]

Some 401k’s require You to pay the loan in full if you leave your current employer. So if you leave to move before the loan is paid off, you might have to pay it off anyway.

 

[MantaRider]

Some 401k’s require You to pay the loan in full if you leave your current employer. So if you leave to move before the loan is paid off, you might have to pay it off anyway.

I never thought about that, I need to check that out

 

[MantaRider]

Some 401k’s require You to pay the loan in full if you leave your current employer. So if you leave to move before the loan is paid off, you might have to pay it off anyway.

I checked the plan provisions, I can continue to make the same payments if I leave for another employer

 

[tvguy]

I would pay off the loan. I've been putting money into 401k's for nearly 40 years and while loans have always been possible, we have always been advised that it is something you should never do. That is why I would pay that loan off and get that money back making money for you.

 

[smiths02]

I would pay it off.
Would you take a 401 K loan to fund a move or to buy a house? If you have $10K and you use it to do those things instead of pay your 401k loan, that is pretty much the same thing. I would only take a 401k loan to avoid bankruptcy or keep a house from being foreclosed, etc.

 

[RamblingMad]

This might be helpful.

https://www.investopedia.com/ask/answers/111815/can-401k-be-used-house-down-payment.asp

 

[ZZBane]

This has nothing to do with your question, but what part of PA are you from? Why do you want to move to FL? If you do, for the love of everything, do your research. I moved down here from PA in June....I’d move back up in a heartbeat

 

[MantaRider]

This has nothing to do with your question, but what part of PA are you from? Why do you want to move to FL? If you do, for the love of everything, do your research. I moved down here from PA in June....I’d move back up in a heartbeat

Pittsburgh. We lived in Atlanta for 4 years and loved it, we only moved back up here because of a medical emergency this year. We are living with family while coming back from it. We have always wanted to move to Florida and both of us hate PA with a passion. The weather sucks, there's nothing to do, and my company has an office in Orlando I could go to instead of the coworking space I use now. Also, DW wants to work for the parks

 

[RamblingMad]

Pittsburgh. We lived in Atlanta for 4 years and loved it, we only moved back up here because of a medical emergency this year. We are living with family while coming back from it. We have always wanted to move to Florida and both of us hate PA with a passion. The weather sucks, there's nothing to do, and my company has an office in Orlando I could go to instead of the coworking space I use now. Also, DW wants to work for the parks

If FL makes you happy, go for it. I don’t like all of the rain and humidity. But if you guys like ATL, then you’re probably good with it. The lower taxes is nice too.

 

[ZZBane]

Pittsburgh. We lived in Atlanta for 4 years and loved it, we only moved back up here because of a medical emergency this year. We are living with family while coming back from it. We have always wanted to move to Florida and both of us hate PA with a passion. The weather sucks, there's nothing to do, and my company has an office in Orlando I could go to instead of the coworking space I use now. Also, DW wants to work for the parks

Fair enough. I actually lived in Cranberry. It had everything I needed within a 5 or 20 minute drive. And I had an awesome job. I now live in Beverly Hills Florida and there is NOTHING here. Yes, an hour and a half from Disney is cool, but it would be nice if the closest Starbucks or Target wasn’t 45 minutes away. I suppose I’m more of a cautionary tale than anything. Not only that, the people down here are insane. However, I agree that PA weather isn’t the best

 

[_19disnA]

I would pay it back and not borrow from the 401K. Those are really funds intended for retirement. Taking loans, even if you pay them back will generally result in a smaller 401K. Many people live beyond their means and don't save enough, then once retired, they find they don't have enough to live comfortably. Asking a stock broker or financial analyst usually gives you one-sided advice, since most make money from what you invest with them so obviously they want you to put as much money as possible in things they control. There is no guarantee markets will always go up and just because the markets were up a lot last year, does NOT mean the same thing will be true year after year. Just look back at the internet bubble of 2000 or the 2008 financial crisis to see that things can change rapidly.

Even if you think you have a secure job today, a lot can change that is not within your control. What if there is a downturn in the economy and the company has layoffs or may sell off certain divisions or perhaps merge with some other company?

 

[Searc]

For people reading along, do not ever borrow from your 401k unless you are literally on the edge of being homeless. That money should never be touched until needed for retirement.

 

[RamblingMad]

For people reading along, do not ever borrow from your 401k unless you are literally on the edge of being homeless. That money should never be touched until needed for retirement.

Which is why folks need liquid emergency funds available.

 

[RamblingMad]

I would pay it back and not borrow from the 401K. Those are really funds intended for retirement. Taking loans, even if you pay them back will generally result in a smaller 401K. Many people live beyond their means and don't save enough, then once retired, they find they don't have enough to live comfortably. Asking a stock broker or financial analyst usually gives you one-sided advice, since most make money from what you invest with them so obviously they want you to put as much money as possible in things they control. There is no guarantee markets will always go up and just because the markets were up a lot last year, does NOT mean the same thing will be true year after year. Just look back at the internet bubble of 2000 or the 2008 financial crisis to see that things can change rapidly.

Even if you think you have a secure job today, a lot can change that is not within your control. What if there is a downturn in the economy and the company has layoffs or may sell off certain divisions or perhaps merge with some other company?

In my experience advisors love to push their annuities. Wall Street makes money from fees, not making you money. These are Ivy League salesmen at the end of the day. The system is stacked against you from the moment you walk into kindergarten.

 

[tvguy]

In my experience advisors love to push their annuities. Wall Street makes money from fees, not making you money. These are Ivy League salesmen at the end of the day. The system is stacked against you from the moment you walk into kindergarten.

You certainly have to educate yourself. I am in annuities that have a current value based on the value of the investments, and a guaranteed locked in value that is tens of thousands dollars higher. The catch, I can't take a lump sum out, I have to take the distributions beginning at age 65. If I die before taking out the guaranteed locked in value, my family can continue the payments until that money is exhausted. If I live longer than projected, they keep making the payments even if I have exceeded the locked in value.
My mom lived 15 years past her life expectancy and was paid out over $100,000 more than the locked in value of her annuity. So annuities can be wonderful investments.

 

[MantaRider]

So I understand the money would best be spent back in the 401k. However, is there any sense in trying to achieve my other goals first? We are going to move no matter what, but we could put off buying a house to work on the loan. Not sure if that's wise or not because I'm also losing money towards rent right now.

Basically this whole situation sucks. I had to take out the loan, because I used it to cover credit card debt that I wouldn't have been able to pay off otherwise.

 

[RamblingMad]

So I understand the money would best be spent back in the 401k. However, is there any sense in trying to achieve my other goals first? We are going to move no matter what, but we could put off buying a house to work on the loan. Not sure if that's wise or not because I'm also losing money towards rent right now.

Basically this whole situation sucks. I had to take out the loan, because I used it to cover credit card debt that I wouldn't have been able to pay off otherwise.

You need to calculate out the price to rent ratio for where you want to live, and then make that decision on your own.

 

[MantaRider]

Thanks everyone. I really appreciate the input. We were always really on top of things financially, so it hurts a lot to have to deal with all of this debt right now. It doesn't really feel real yet.

 

[TwoMisfits]

So I understand the money would best be spent back in the 401k. However, is there any sense in trying to achieve my other goals first? We are going to move no matter what, but we could put off buying a house to work on the loan. Not sure if that's wise or not because I'm also losing money towards rent right now.

Basically this whole situation sucks. I had to take out the loan, because I used it to cover credit card debt that I wouldn't have been able to pay off otherwise.

Renting in a new area before buying is probably the best approach anyway. It's what I've done every move b/c while you can visit, you just can't get a real sense of where you want to live before you've been onsite 6-12 months...

And since you pay $200/month for the loan under $10K, I'd reserve another $200/month in a separate account (and save any tax refund this year for it)...it should let you pay it totally off within 2 years or less and get back to your house buying plans...