I was fortunate enough to let my spidey senses dictate and pulled my 401k to cash in 2008 when the dow was around 13000. Unfortunately I’m still in cash.

It seems like this would be a great time to take a 401k loan out for as long as you plan to be bearish. You could take a loan out for an amount up to your “no risk” number and still grow equity by paying yourself the interest.

I’m considering this for the down payment on a house. Sound like a good idea or did I miss something?

I want to continue working. So, I want to
keep my company 401K balance low, while
taking advantage of the matching etc.

LOAN TRANSFER TO MY ROTH?

So I want to use a 401K loan with my current
company to *TRANSFER* to my ROTH with outside
Investment Company EJones. (My current company
can’t see my EJones balance). I don’t have
enough money each year to pay the maximum
possible on my ROTH. I could pay $2,000 more
for my ROTH and $2,000 more in my wife’s ROTH.

So here’s the plan – *See Any Problems*

I take out a $4,000 Loan from my current company
401K, with a 12 month payback, using my current
401K contribution portion, which is *Above* the
matching limit (I don’t lose any matching funds), to pay back the loan.

I transfer the $4,000 to our ROTH accounts
immediately (next day). Now this money is
“working” for me in the market.

At the end of the 12 months:

My Company 401K balance is lower and will
look “worse” to my HR department,
making it less likely they will try to
force me into retirement.

The money remained in the market, growing
appropriately.

ROTH money is tax free when withdrawn.

I am out the fees from the 401K loan, but
the interest went back into the 401K
account at work.

* I repeat this every year. My company 401K
account stays low and I can work longer
because “I’m not able to retire yet.”

Comments please – thanks!

Matt Henson

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?