Tell DH he is NOT borrowing from his 401K!

[lovesmurfs]

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.

This. I was looking at the possibility of doing a loan (at 5%) as a way to consolidate my credit card bills and then realized if DH gets a job somewhere else and we need to move, it hits REALLY hard.

 

[timmac]

Most of the good reasons against borrowing have already been listed: losing growth opportunity, potentially at risk if the job ends, may not be able to contribute while paying it back, etc.

One that's been mentioned on this thread though, but is somewhat inaccurate, is the belief that you're "paying tax twice" on money borrowed from a 401k. At risk of sounding pedantic, I think it's worth busting that myth. The only thing that's taxed twice is the interest paid on the loan. The principal amount, is taxed once--and only once--at the time of withdrawal from the account.

Yes, a 401k loan is paid back with post-tax dollars... just like any other loan would be. A thought example that makes it more obvious, suppose you take a $1,000 loan from a 401k... then stuff that cash in your mattress. You then use that cash from the mattress to pay the loan back. No extra tax was paid.

Anyway, with the "never say never" phrase still important, I'm not in any way saying that a 401k borrow is a good idea. I just hate to see misinformation used to justify the decision

 

[TinCup]

Has your Husband considered reducing his 401K contribution percentsge to give you a little more cash flow?

I would never reduce my 401K contribution below my employer's matching percentage because that is free money (a guaranteed 100% return). My employer matches 6% so my 401K contribution would never go below 6%.

If your husband is contributing 10% to his 401K with a 6% company match he could reduce his contribution to 6% which would create additional cash flow of 4% of thus sallary.

 

[timmac]

If your husband is contributing 10% to his 401K with a 6% company match he could reduce his contribution to 6% which would create additional cash flow of 4% of thus sallary.

Minor nitpick... that 4% would be subject to the various taxes that it wouldn't otherwise be as a 401k contribution. So in reality you'd be looking at 2.5-3% additional cash flow (depending on tax bracket, state tax level, etc)

 

[TinCup]

Minor nitpick... that 4% would be subject to the various taxes that it wouldn't otherwise be as a 401k contribution. So in reality you'd be looking at 2.5-3% additional cash flow (depending on tax bracket, state tax level, etc)

You are correct. Thank you for the clarification!

I chose not to bring up the the pre-tax v. post-tax issue since I didn't want to confuse the two points that I was trying to make. Which was, the original poster may be able to increase their cash flow by reducing their 401K contribution percentage, and not to reduce the contribution percentage below the company match.

Thanks again for the clarification.

 

[Mom2Ben02]

I am not sure of the rules in MI, but in IL you can get Unemployment Insurance for a pay/hours cut.

 

[DisneyEater]

Bottom line, if your pay has been cut 16%-17%, you need adjust to that new reality. A loan is only a temporary fix. You need to either cut expenses or raise income (actually raise income, not borrow money) by that same amount to survive long term.

A 401K loan may make sense in some cases (I am not one of those NEVER people), but doesn't make sense here as the solution needs to be a long term one.