Tell DH he is NOT borrowing from his 401K!

[yoopermom]

I'm sorry, I know it's been discussed here before, but...

DH only started at his current job 5 years ago, so doesn't have a huge 401K built up yet despite being 50. He is now facing a partial layoff (currently works 6 12s in a 2 week shift, will be cut back to 5), and is worried about not being able to pay the bills.

A friend he works with borrowed against his 401K and is having the repayment taken out of his paycheck, so now DH thinks it's a good idea.

I was raised to believe that you *never* touch your retirement nest egg, so this goes against everything I believe in, but I need the logical reasons to explain to him why this is a bad idea. (We've discussed getting extra jobs, cutting back on expenses, etc.)

TIA!

Terri

 

[mrsklamc]

The tax penalties will be insane.

 

[clh2]

Obviously - everyone's circumstances are their own - and not all advice is good for everyone.

As far as borrowing against a 401K - this is usually not a good idea. E.V.E.R.

Money goes into your 401K - pre-tax. If you borrow against this money, and then have to pay it back - you pay with "post-tax" money. (And then when you withdraw the money when you are retired - you pay your "regulary income tax" on the withdrawal. So - essentially - you will pay "income taxes" 2-times on this money.

And, I know with "MY" employer - if I take a loan out from my retirement account - I cannot make contributions to my account until the loan is paid back.

And - if I were to leave my employer while a loan is outstanding - you have a very short window to pay it back - or it is considered a taxable withdrawal, that would also incur the "10% early withdrawal" penalties that our friends at the IRS impose. Te money needs to be paid back ASAP - if you get terminated from your job as well.

Now - what your DH is probably hearing from his friends that are doing this, which is "why" this sounds like such a great deal - you get charged interest on your loan, but the interest gets paid back to your own account. Yes, this is true. But unless the interest you are charged is more than the amount of extra cash you need due to needing post-tax dollars, this isn't a good financial decision.

Now - with all financail advice you get from the DISboards - remember it is worth what you are paying for it. If you really want good advice, that is targeted for your specific circumstances (i.e. ages, years to retirement, kids that need college funds etc) you should really find a good financial planner.

 

[clh2]

I'm sorry, I know it's been discussed here before, but...

DH only started at his current job 5 years ago, so doesn't have a huge 401K built up yet despite being 50. He is now facing a partial layoff (currently works 6 12s in a 2 week shift, will be cut back to 5), and is worried about not being able to pay the bills.

A friend he works with borrowed against his 401K and is having the repayment taken out of his paycheck, so now DH thinks it's a good idea.

I was raised to believe that you *never* touch your retirement nest egg, so this goes against everything I believe in, but I need the logical reasons to explain to him why this is a bad idea. (We've discussed getting extra jobs, cutting back on expenses, etc.)

TIA!

Terri

Oops - forgot the rule!

 

[bdcp]

The tax penalties will be insane.

There are no penalties for borrowing against your 401K in some circumstances. There are however if you withdraw.

Part of our plan if DH were to be laid off is to borrow against my TSP which is a 401K. That plan was agreed upon with our CFP. Much better to borrow from mine than to withdraw from his. You cannot borrow against one if you're not putting into it, as in still working. I'm a Fed Gov employee who is at no risk of losing my job. DH is a Fed contractor who was facing losing his job, but now it appears he will have a new job, just with a pay cut. We dont' know how much a cut yet, but we have a cushion so we don't plan to do anything except make some personal cuts to fit in our new budget, while maintaining our cushion.

You can never say never if it means surviving.

 

[mikehn]

the only time this might make sense is during a long term bear market - in which you are selling high and buying back low.

 

[eliza61]

I'm sorry, I know it's been discussed here before, but...

DH only started at his current job 5 years ago, so doesn't have a huge 401K built up yet despite being 50. He is now facing a partial layoff (currently works 6 12s in a 2 week shift, will be cut back to 5), and is worried about not being able to pay the bills.

A friend he works with borrowed against his 401K and is having the repayment taken out of his paycheck, so now DH thinks it's a good idea.


TIA!

Terri

The tax penalties will be insane.

Usually if you take a loan there are no tax penalties. Our 401K's you can borrow 50% of the value and then you pay it back out of your payroll.

Now that being said, your dh is saying you guys are having problems paying the bills. So would I starve as opposed to using my 401K? no. but it would be the absolute last resort. I agree with you, I would investigate part time jobs, ebay sales, cutting back etc etc.

 

[akcire]

I'm sorry, I know it's been discussed here before, but...

DH only started at his current job 5 years ago, so doesn't have a huge 401K built up yet despite being 50. He is now facing a partial layoff (currently works 6 12s in a 2 week shift, will be cut back to 5), and is worried about not being able to pay the bills.

A friend he works with borrowed against his 401K and is having the repayment taken out of his paycheck, so now DH thinks it's a good idea.

I was raised to believe that you *never* touch your retirement nest egg, so this goes against everything I believe in, but I need the logical reasons to explain to him why this is a bad idea. (We've discussed getting extra jobs, cutting back on expenses, etc.)

TIA!

Terri

Will he be happy working at 90? If you have no retirement money, you don't retire you work until you die. Many people in my area in their 70's and 80's working retail to pay the bills. Social security will not cover most peoples needs or it will cover the day to day, but when the roof needs to be replaced or a car needs to be replaced there is no money.

My mom is 66 and works part time for the enjoyment. However many of her co-workers are older than her and are working to live. Nothing can be more motivating to save now than seeing an octogenarian working a rather physical job to be able to afford their living expense due to poor planning.

In the end everyone has to make their own decisions, but I would be hard pressed to take money from my 401K unless it meant life or death--as in without food, medicine, medical care, or housing I will die; but that's just me.

 

[allison443]

I'm sorry, I know it's been discussed here before, but...

DH only started at his current job 5 years ago, so doesn't have a huge 401K built up yet despite being 50. He is now facing a partial layoff (currently works 6 12s in a 2 week shift, will be cut back to 5), and is worried about not being able to pay the bills.

A friend he works with borrowed against his 401K and is having the repayment taken out of his paycheck, so now DH thinks it's a good idea.

I was raised to believe that you *never* touch your retirement nest egg, so this goes against everything I believe in, but I need the logical reasons to explain to him why this is a bad idea. (We've discussed getting extra jobs, cutting back on expenses, etc.)

TIA!

Terri

I am not understanding-if the decreased salary won't cover the bills, how is the decreased salary going to cover the bills plus the repayment of the 401K loan? Would the repayments start right away?

 

[yoopermom]

The tax penalties will be insane.

That was my vague notion of why not to do it

Money goes into your 401K - pre-tax. If you borrow against this money, and then have to pay it back - you pay with "post-tax" money. (And then when you withdraw the money when you are retired - you pay your "regulary income tax" on the withdrawal. So - essentially - you will pay "income taxes" 2-times on this money.

And, I know with "MY" employer - if I take a loan out from my retirement account - I cannot make contributions to my account until the loan is paid back.

And - if I were to leave my employer while a loan is outstanding - you have a very short window to pay it back - or it is considered a taxable withdrawal, that would also incur the "10% early withdrawal" penalties that our friends at the IRS impose. Te money needs to be paid back ASAP - if you get terminated from your job as well.

Now - what your DH is probably hearing from his friends that are doing this, which is "why" this sounds like such a great deal - you get charged interest on your loan, but the interest gets paid back to your own account. Yes, this is true. But unless the interest you are charged is more than the amount of extra cash you need due to needing post-tax dollars, this isn't a good financial decision.

Thank you SO much, these are the kind of arguments I need!

There are no penalties for borrowing against your 401K in some circumstances. There are however if you withdraw.

You can never say never if it means surviving.

This is truly not a matter of "survival" for us (thank God), we actually have a hefty savings and I'm a state employee (vested in the retirement system).

Usually if you take a loan there are no tax penalties. Our 401K's you can borrow 50% of the value and then you pay it back out of your payroll.

Now that being said, your dh is saying you guys are having problems paying the bills. So would I starve as opposed to using my 401K? no. but it would be the absolute last resort. I agree with you, I would investigate part time jobs, ebay sales, cutting back etc etc.

We pay the bills ok, but we'll have 1/6 less salary, so need to cut the bills by that much, or earn that much more, or touch the savings...

Will he be happy working at 90?

In the end everyone has to make their own decisions, but I would be hard pressed to take money from my 401K unless it meant life or death--as in without food, medicine, medical care, or housing I will die; but that's just me.

That's just how I am, and how I was raised, but his parents are still working p/t while on s.s. in their mid 70s because they never put away a penny towards their retirements, so he's learned more from me than from them...

I am not understanding-if the decreased salary won't cover the bills, how is the decreased salary going to cover the bills plus the repayment of the 401K loan? Would the repayments start right away?

That's what I've tried to explain to him, too, that unless the interest rate is so HUGE on what he is paying, there's no point in consolidating it, in essence, with a 401K loan.

Thanks EVERYONE for your advice. As little as our CD is earning with our long term savings in it, I think we're still better dipping into it rather than touching his 401K.

You're the best!

Terri

 

[a1tinkfans]

while the immediate response is DON'T touch a 401K, there was a time when it has worked for me in the past.
My company let me take a loan against my 401K, I paid myself the interest/principal back and it was deducted right from a paycheck (this is many years ago by the way) Basically I paid myself and had no penalty...there was no negative to me at the time...
However that also meant that when I left said company, I had to pay back the loan in FULL to avoid a HUGE penalty....Honestly, for me, paying it back was not an issue...I was in a good position at the time I left and it was a definite win-win situation....I was not penalized to pull my $$ from elsewhere (where I would have incurred interest paid to someone else, and Big tax implications), thus it worked.
However, in todays economy and with layoffs and cut backs I would not consider this as a viable option unless absolutely desperate, like losing a homestead. And even then Id first meet with a financial advisor first. If you are already in a financial pinch, this can not only wipe out the "now" but also wipe out your future! Interestingly enough, a very similar conversation is being bantered about with so many parents using 401Ks for college costs (another scary NO-NO) try and avoid it...
Just want to wish you the very best of luck...I hope you can try and cut costs elsewhere to make up for the loss of the money ...not coming in.....scary times indeed

 

[ZehnJahren]

Don't forget that your 401k balance is safe in the case of bankruptcy. You withdraw it, and you lose that safety. If, God forbid, you would have to declare bankruptcy, that money would be safe even if you lost everything else.

Retirement is very important. Unless you have no other choice at all, I wouldn't do it - I also know people working in their 70s, 80s, and beyond, and it's very sad and very stressful for them.

 

[MomToOne]

The tax penalties will be insane.

That was my vague notion of why not to do it

As a PP said, there are no tax penalties when you take a loan from a 401K, only if you take a withdrawal. They are very different beasts.

 

[tinkmom2]

My hubby has almost 30 years with Walgreens and recently took a $6.00/hr pay cut as an assistant manager. I am done with school in Spring but that is no guarantee I can find a job. My hubby took a loan which is deducted from his paycheck. His paycheck is cut in half now and the loan comes out of it every paycheck for many years. If he quits the loan will be paid back first. The loan we don't have to pay a tax penalty on but you do if you take a hardship withdrawal for the purchase of a primary residence or payment of medical bills. You can request to have taxes taken out right away so it doesn't hurt you at tax time. I am hoping we will be getting more money back because we will fall into a different tax bracket?

I wish my hubby could quit his job. It's like they slapped him in the face. We are just expected to live on half his salary. But we need the insurance. Both my youngest and DH have been sick. Looks like my hubby may be going back to school too!

Good luck with what ever you decide.

 

[disney1990]

When your DH borrows from his 401k and then loses or quits his job, that money is due back immediately. Otherwise, it is treated as a withdrawal, with all the penalties and taxes due on the money. Something to think seriously about.

 

[sarah4770]

When your DH borrows from his 401k and then loses or quits his job, that money is due back immediately. Otherwise, it is treated as a withdrawal, with all the penalties and taxes due on the money. Something to think seriously about.

a loan on a 401 is not treated as a withdrawal unless you get teminated or quit and cannot repay. having said that, it can be a way to get a low interest l on a car or a home, if your job is secure and interest rates are high. But just to pay bills due now? It would be wiser to seek other avenues, such as a part time job or cutting the cable.

 

[disney1990]

a loan on a 401 is not treated as a withdrawal unless you get teminated or quit and cannot repay. having said that, it can be a way to get a low interest l on a car or a home, if your job is secure and interest rates are high. But just to pay bills due now? It would be wiser to seek other avenues, such as a part time job or cutting the cable.

Isn't that what I said, "When your DH borrows from his 401k and then loses or quits his job, that money is due back immediately. Otherwise, it is treated as a withdrawal, with all the penalties and taxes due on the money. Something to think seriously about."

In this economy, nobody knows when or if they are going to lose their job. OP already said that her husband is facing a "Partial Layoff". That sends all kinds of warning signs to me.

 

[Buzzsgramma]

DH and I are retired...for 4 yrs...we never took money from our 401K till we retired...never borrowed either..
I think borrowing is a very bad idea...look for some part time work...sell things on Craigslist and E-Bay...cut back...

 

[drinkme]

I think it's better to take from your 401k than to foreclose on your house & file bankruptcy. However, he can't borrow from his 401k if he loses his job (correct????).

I think the OP knows about the penalty for early withdrawal (if her dh can't pay it back). But don't you think the 10% penalty is better than losing your house or becoming bankrupt? Especially since her dh has only been saving for 5 years, the 10% can't be that much.

Tough call. Many people have lost EVERYTHING in this economy....house, savings, retirement.

 

[ZehnJahren]

I think it's better to take from your 401k than to foreclose on your house & file bankruptcy. However, he can't borrow from his 401k if he loses his job (correct????).

I think the OP knows about the penalty for early withdrawal (if her dh can't pay it back). But don't you think the 10% penalty is better than losing your house or becoming bankrupt? Especially since her dh has only been saving for 5 years, the 10% can't be that much.

Tough call. Many people have lost EVERYTHING in this economy....house, savings, retirement.

If you take out of the 401k, you definitely lose it. So if you were going to have to declare bankruptcy and used the money in the 401k as a last resort and then end up having to declare, now you literally have nothing. If you leave the 401k intact and declare bankruptcy anyway, you still have the 401k.

It IS a tough call; I can't imagine having to make the decisions some people have been forced to make. But for me, the 401k is untouchable. I monitor it, but would never use it for anything at all besides retirement; it's "safe money". I do not want to work into my 70s or beyond.