401K Loan

[SFMD28]

I've only ever heard extremely negative things about taking a loan from your 401K. What I've read online doesn't really justify how strongly it seems to be discouraged which makes me think I'm not understanding some aspect of it.

My understanding is that you take the loan from your account, pay interest on the money (which goes back to YOU and not the company the 401k is through) and only get hit with penalties if you don't repay or follow the terms of the loan.

Overall this seems like a good option to me to try and pay down higher interest debt (residual credit card debt related to relocation, etc.) since you keep that interest and the 401k still gets that 'return' of the interest payments.

Am I missing something? Thanks.

[Zaphod]

The cost is entirely opportunity in the form of lost compounding, but forever. Your best bet is that you've time it perfectly before the next crash or pay it back so fast things havent changed much. If the latter was possible you didnt really need it. It also sets a bad precedent. Usually, its just easier than the other options which is a pretty terrible reason to do something of this nature. You should be able to come up with what should be small nominal amounts with your paychecks.

Heloc or even a personal loan would be a better trade off. Best of all would be an overall plan to get the financial house in order and tackle these issues. I worked all through high school and college and had nice 401k balances for a youngster, but I cashed them out for med school expenses, relocation, etc...it probably wasnt at all necessary, but it was easy. So dumb. Some of that money would have been in the market for 20+ years now, too bad.

Dont do it.

[DMFA]

HELOC imo.  SoFi also has some decent personal loan options.  I'd borrow for simple interest versus taking away my own compounding gains.

[jfoxcpacfp]

SFMD28 wrote:

I’ve only ever heard extremely negative things about taking a loan from your 401K. What I’ve read online doesn’t really justify how strongly it seems to be discouraged which makes me think I’m not understanding some aspect of it.

My understanding is that you take the loan from your account, pay interest on the money (which goes back to YOU and not the company the 401k is through) and only get hit with penalties if you don’t repay or follow the terms of the loan.

Overall this seems like a good option to me to try and pay down higher interest debt (residual credit card debt related to relocation, etc.) since you keep that interest and the 401k still gets that ‘return’ of the interest payments.

Am I missing something? Thanks.

Click to expand...

My view is different from the mainstream and I hesitated before posting, but you're a doctor so what the heck. The typical borrower from a 401k uses the loan as a cash resource when all other options are dry. When he eventually changes jobs, his retirement is permanently impacted and that's a very bad thing.

However, I don't have such a problem with a short-term 401k loan. It's a quick and simple source of funds in a crunch as long as it will be paid back fairly soon. You even have a 30% chance of making money as the market is up 7 days out of 10. As long as you are not making a habit of it, I don't have a problem with borrowing money from your 401k for a few months if you need funds to bridge a gap. After all, you cannot borrow over $50k - you're not risking that much in 3 months and it could be a big time-saver when you're too busy to shop banks.

If, as you mentioned, you have high rate credit card debt (double digits), keeping the loan for longer could be an option, but I would strongly urge you to shore up your budget and get a plan in place before relying on your 401k as a long-term solution. After all, if you managed to save that much in your 401k by borrowing on your credit card, something was amiss in your priorities. Professional help may be in order.