While we can all agree on the negative effects
of a 401k loan , how about a 401k withdrawl
for those who are over 60 yrs old therefore
would not be penalized ?

thanks, Paul

You’re example is great.
10K loan on the 15th of December 2007.

I wish you would consider tracking and redoing the math every 15th of December, until the end of the 48 months.

Follow the S&P with your 10K loan.

How much would you will potentially gained had you avoided the market tumble and are now paying back/buying back shares at dirt cheap prices as you repay your loan.

For additional bonus points…
Tack on the elimination of that 15-30% CC interest that made you dip in your 401K in the first place.

If you take out a 25,000 loan with a 4% interest rate, you’re going to be paying back $564.48 per month.

If you put that $25k into a savings account, is it paying you interest constantly, monthly? yearly? Assuming yearly, you won’t get your first return until the 1st year is paid.

So you’d get $25k-monthlies * 0.04 = $729.05 in interest for that first year. You’ve paid yourself back $6773.76, so you only have $18226.24 left in the magical savings account.

Second year: $458 in interest from the savings account, 11452.48 left in it.

Third year: $187.15 in interest, $4678.72 left in the account.

Fourth year: You’d run out of money before the end of the year, so you wouldn’t get any interest. On top of that you’d have to come up with $2095.04 from your own pocket to cover the obligation of paying yourself back.

Since the magic interest from the savings account only adds up to $1374.30, you still need $720.74 to pay the rest of the payments. That $720.74 comes out of your pocket, as post-tax dollars. (say you’re in the 28% tax bracket, that means it cost you $280 owed to taxes to borrow that money).

So no, you don’t get any free cash to spend. Your 401k might do well in the current market though, to do that, since the annual return is something like -50% for 2009!

If I have $50,000 in my 401k I can take out a loan for $25,000 at 4% interest rate. I can take the $25,000 an put it in a high yield savings account and get 4% interest on it. If I use the savings account to pay back the loan am I not getting 4% at no cost to me since the interest from the 401k loan goes back into the 401k account?

But it seems that how big that opportunity cost is depends greatly on the motion of the market. So the lucky ducks that borrowed from their 401ks a year or so ago and are paying themselves back 6% have, it turns out, really helped their overall finances long and short term.

If that’s true, is the corollary true? Assuming that as of this October, the market can really only go up, that the opportunity cost of the 401k loan is greatly amplified by the expectation (likely?) that the market will rise substantially over the loan repayment period?

Comments?

PS My contribution has been 9%, with employer match up to 3% and I have 16 years to retirement.

Status:
Company match is 100% up to 4% of pay, none thereafter.
Contribution is at 10%
401k return so far this year is -8%
I am over 50.
Large amount on CC to repair Mom’s house for sale – but there it sits waiting for a buyer in this market.

Rather than take a 401k loan to payoff the CC, I am considering reducing the 401k contribution to 4% so I still get the company match, and get a little extra payroll $$ to accelerate payoff of the CC.

Once the CC is retired, the percentage would go back up to at least 10% (if not more). Once the house sells, I can put the money back in to the 401k in $5k chunks under “catch-up” provisions.

Your thoughts?

“You would not have $1060 to pull out in retirement. The 6% in interest does not go to you, it goes to the plan sponsor (unless you are the plan sponsor). When you deposit the $1060, the $60 goes to the financial institution, not you. Only the $1000 goes to you, and while the $1,000 was out, it wasn’t earning anything in your 401(k). It created a lost opportunity cost in addition to costing 6%.”

Actually, with a 401(k) loan, you are paying yourself back with interest. That 6% goes to you, not the plan sponsor.

You are correct that you lose the growth on your money while it’s out of the 401(k).