Have You EVER Borrowed Against Your 401K?

Discussion in 'Et Cetera, Et Cetera' started by HellsKitchenmanNYC, Mar 21, 2009.

  1. HellsKitchenmanNYC

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    Thot I'd throw this out on the floor. Our financial person at work was on vacation this week so the only info I could get was that you can borrow up to half of what's in yr 401 and you have 5 yrs to pay it back with interest. Does anyone know what the interest is? There's NO info about this on our 401 website.
    I'm trying to figure out if I'm shooting myself in the foot and curing a prob now for a bigger headache later. Any info is greatly appreciated!
    Hells
     
  2. thadjock

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    i'm not a financial guy, but i looked into this several years ago when i bought my house, not sure if the rules have changed now or not, but at the time they were considering allowing some exemptions for first time home buyers.

    even so, i was told in short, you're better off doing ANY other option you have than digging into an IRA Or 401k. regardless of the interest rate, because if you end up not being able to put it back within the time limit (there are different rules for IRAs, roth IRAs and 401k's and SEP's) , you get some pretty big penalties and taxes from the IRS.

    unless you owe money to the mob and you're in danger of losing digits or limbs, go another route. in my case the seller floated a note for the difference and i worked my ass off doing overtime to pay him back in one yr. i'm glad i didn't trash my retirement, so that wallstreet could now. lol
     
  3. JustAsking

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    Hells,
    You can borrow up to half of your account balance, or $50,000, whichever is lowest. The interest rate is set by your plan administrator, who is the person at your company who administers the plan. The rates are usually quite reasonable, but since you are paying the interest to yourself, it is not too much of an issue.

    However, what thadjock says is true. If you fail to pay it back, the penalties are fierce. At that point it might be better to owe it to Tony Soprano than your 401k plan and the Federal Gov't.
     
  4. transformer_99

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    I'd advise against it. Then again, raiding all of it it before the recent year's stock market crash would've come out better than just watching it drop to what it was worth before Bush ?

    Back in the 80's, corporations raided pension funds, guess today they still do with thru the stock market. Zero and negative rate of returns must be nice for corporations. Glad Social Security never was privatized as Bush wanted to do.

    Twelve Reasons Why Privatizing Social Security is a Bad Idea
    Bush's Social Security Sleight of Hand

    The more I think about how much that retard was trying to steal, the more it astounds me that he got 2 terms period.
     
  5. midlifebear

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    I cashed all my IRA's, KEOGH, and 401K at the same time back in 1999. I took an across the board 10% hit which was deductible on my income tax. It may seem that 10% was a "horrible" penalty, but compared to where that same investment income would be today it's the best thing I ever did. But that's my situation. Who knows, maybe the stock market will rebound and the dead will live again.
     
  6. HazelGod

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    Yes, borrowing against your 401(k) should be a last-gasp option.

    The downside is that any amount you borrow disappears from your balance; so if any of your investments are down from your purchase price, you realize an immediate loss. Furthermore, your now reduced portfolio will grow at a slower rate because of the way compounding works.

    The upsides are that many employers offer automatic payroll deductions to repay these loans, and the interest you pay on the loan is paid back into your account.

    Long story short, I'd consult a financial adviser before considering this...they'll help you figure if there's any other way to get capital without assuming this level of risk.
     
  7. MARCOPOLO4

    MARCOPOLO4 New Member

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    one word---DON'T
     
  8. B_starinvestor

    B_starinvestor New Member

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    The rates are generally tied to the Prime rate, i.e. prime +2 or prime plus 3.

    Keep in mind also that the loan repayments are taken from your check after tax; not pre-tax as your 401(k) contributions.
     
  9. thadjock

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    Disclaimer: i had the following thoughts w/o benefit of knowing all the specifics of your situation.

    A) i'm not a tax expert but i'm having trouble imagining a scenario where you would be allowed to deduct the 10% 5329 penalty on ur 1040. Not only do you pay the 10% penalty, unless the entire amount represented a capital loss, you also end up paying tax on that money at your regular earned income rate, which could be as much as 35% on top of the ten(and because it's part of your AGI u also pay state taxes where applicable), depending on your bracket. the other "cost" you incurred by taking your money out of a qualified plan is that from '99 forward, any increase in value was then subject to cap gains. but maybe u have very creative tax advisor.

    B) what did u do with the money since '99? real estate? the truth is all investment comes with risk, and in this ecomony you can't point to ANY investment sector that hasn't retracted. if you want a pat on the back for timing the market to avoid the recent drop, you were about a decade too early. i don't feel entitled to gloat over not giving all my money to bernie madoff, and i also don't see how bailing out of all ur retirement plans in '99 could have been a good idea, from any POV.

    PS: yes the market WILL rise again, and it's not dead by any means.
     
    #9 thadjock, Mar 22, 2009
    Last edited: Mar 22, 2009
  10. HellsKitchenmanNYC

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    Thx folks for all the thoughtfull responses. I'm rethinking this. I didn't want to borrow alot just about 3000. Lately folks have been telling me to move my 401 to a Roth account b/c supposedly if u borrow from it it's alot less painfull.
     
  11. JustAsking

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    Another thing to keep in mind is that every dollar in your 401k at this moment used to be $3 to $4 dollars 18 months ago. So that 401k $1 has only one way to go in the next 5 years, and that is up.

    If you weigh value of that loan being paid back over 5 years vs the upside potential of leaving the money in the 401k, I think there is no contest.
     
  12. jason_els

    jason_els <img border="0" src="/images/badges/gold_member.gi

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    Drive a cab.
     
  13. thadjock

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    and if u use a hidden camera so you can blackmail your fares, & u'll have that $3k in no time.
     
  14. earllogjam

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    My banker told me of one client who cashed in his non performing 401K funds which was about $300K after paying the taxes and penalties and bought 3 foreclosed distress sale homes with the money. He now owns 3 rental properties giving him a 10% return, positive cash flow even after the monthly mortgage is paid by the tenants.

    He has all the real estate tax breaks now on his investment a phenomenally low interest rates on his mortgages as well as property that is only bound to go up in value in the future since he bought so low.

    Although house prices have plummeted, rental costs have pretty much remained the same, or even gone up since there are more people looking to rent these days. It sure beats getting 1-2%(if that) on a 401K that may take years to recoup all the losses if at all.
     
  15. SpeedoGuy

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    Never been tempted to for many of the reasons suggested here but I know several people borrowing from theirs.
     
  16. SpeedoGuy

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    Have noticed this as well and am puzzled by it.

    Is there a lag between the time of the onset of a recession and a drop in rents? Or do rental costs not reflect larger trends?
     
  17. midlifebear

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    Very good questions:

    Yes, all investment comes with risk, but in my life time I've been much more secure with investing in assets I can touch, insure, renovate, and lease. I never worried about investing in the 401K's offered by my employers because I was never in control of the money. But once you quit a job and don't have the option of transferring a 401K to another company, you end up converting it to an IRA. I had several. Plus, as a self-employed person I had a KEOGH for a while. But the year I cashed them all in was also a time when it was legal for me to take that penalty as a deduction. I don't know why. You'd have to ask my CPA.

    As for real estate: I ended a long post in the universal health care thread explaining that after I slam-dunked my GED (in 1967) I took Real Estate evening classes offered by the California State university I attended while carrying a full school load during the day. Working as a bartender in the gay bars of San Francisco during the 1970's was great work and paid extremely well in tips, until the IRS decided they needed to tax tips. Don't university students still work as bartenders, waiters and waitresses these days?

    I still recommend (and think it's really dumb not to) for everyone thinking about buying their first home attend real estate school. You don't have to do it to become your own Realtor. But the information imparted in real estate schools is an enormous asset to have when house shopping. However, I got my first Realtor's license while I was still an undergraduate and was able to sell homes in the 1970's when it was one of the absolutely the worst times in the history of US real estate to think of real estate as a career. In that decade, mortgage rates were commonly 18% and NO ONE could afford to get into a home without at least 15% to 25% of the down payment in cash -- unless you bought HUD home. I helped a lot of friends and colleagues get into their first HUD home during those years. Still, mortgages were steady at about 15% to 18% into early 1980, when they finally started to become reasonable again. But in my case I would have never been able to accomplish what I have without having worked part-time in real estate most of my life. However, not everyone is cut out to work (especially honestly) as a Realtor.

    I'm not Warren Buffet. And many will advise EVERYONE NOT TO INVEST IN REAL ESTATE, but someone is. I have and still do. But it requires a great amount of attention to detail. You need to understand the inherent risks when buying your first home. Few do. Notice all the foreclosures in the USA? You also must be willing to not be greedy. For people in my position, the USA real estate market is ripe for picking. For others who profess powers beyond that of a Magic 8 Ball, the stock and bond markets seem like the only "sure" long-time investment. Others are addicted to gambling in the commodities exchange.

    I like to walk around and touch the stuff that churns in a regular annual income for me -- even in these "uncertain economic times." There was a time I had an investment portfolio -- apart from any IRA/401K/IRA when I had more than 10,000 shares of AmEx that surprisingly split - three ways. That's the only account I kept for any length of time until those shares had worked their way back to the $50 range (three or four years after that split). Then I dumped that stock as fast as I could, paid the capital gains (which used to be quite fierce) and reinvested that money in things I understood better. Personally, I have no alpha male interest in monitoring P/E ratios and speculating in companies or corporations.

    I remember a time when all my coworkers were spending more time (mid 1990's) watching their index funds in a separate window on their office desktop monitors than doing very much work as software engineers. We all shared in the cost for a Morning Star subscription and had "The Bob" and "The Non Bob" investment clubs named after a great coworker and friend who convinced us it would be fun to have a small investment club at the office. Bob's track record wasn't the greatest, so another coworker started the Non Bob fund, of which Bob was also a member. After a couple of years I realized I was wasting too much energy doing my semi-weekly homework assignments on potential fund investments (besides, Wal-Mart was the only dependable, regular steady peformer, followed by furniture outlet chains). During this same time, in comparison, my rental income properties were slogging along making a regular turtle-paced profit that easily surpassed the annual income from my full-time job.

    There are posters who will tell you that I don't know what I'm talking about. Which is fine. And most people who work full-time for someone or something else have no other recourse for investing and hoping they have enough money for retirement except for a 401K. Of those 401K's I wonder how many employers are currently continuing to match a percentage of their employees' semi-weekly or monthly investment?

    Like I said, it worked for me (I'm 59) and supposedly "retired." I cannot imagine what my life would be like if I hadn't taken control and responsibility for my own financial future -- starting back in 1969. Had I depended upon the miracle of compounding and fabulous Wall Street to get me where I am today, I'd most likely be working as a greeter at Wal-Mart just to eat.

    As I mentioned in my other post I was seriously goal-oriented to be "retired" at 50 when most of my friends were just hoping to be mortgage-free at 50. If anything, over the last 40 years I've had more people try to take advantage of me while I've kept myself clean and legal in all of my business transactions. Sorry about that.
     
    #17 midlifebear, Mar 22, 2009
    Last edited: Mar 22, 2009
  18. B_starinvestor

    B_starinvestor New Member

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    This recession is unique because of the foreclosure situation. Since so many have been displaced from their homes via foreclosure and since it is so difficult to obtain mortgage financing....there is a high demand from renters.


    When banks were giving away mortgage financing a few years ago, landlords were taking it where the sun don't shine, peeps could get a home with interest only financing for the same monthly cost as the rent pmt in many cases.
     
  19. transformer_99

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    Yeah, like the news story of the 90 year old man that's back working after the Bernard Madoff Ponzi scheme took $ 3/4 million. I know that's a defrauding incident rather than it is the market crashing, but a 401-K probably is worth less than what it was 8 years ago, investing in Fortune 1000 investments.

    My @sshole puckers up at the thought of what this bailout is going to really cost the working class. Those industries/corporations are taking that money and to pay it back, they are going to have to be profitable again. That means to me, not only are we giving them the capital today to make the next wonder products for tomorrow, but we'll be required to buy these products for them to make the profits on to pay us back with. We get double dipped and somehow, I get this sick feeling in my stomach that the products they come up with are more "smoke and mirrors" in respect to making our lives better.
     
  20. simcha

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    Take a look at Patrick.net before buying anything, especially in the SF Bay Area.

    It's still a terrible time to buy. Real estate isn't a great investment over the long haul. Just read around that site. He's got so much in the way of evidence and facts and figures to back up his argument.

    It's refreshing to see the National Association of Realtors' arguments cheerleading us into the bubble crash debunked for a change.

    And there is so much information about renting and how rents are being affected in the current market. Rents are going down, down, down, down. Vacancies are rising, rising, rising, rising, especially in San Francisco. People in San Francisco are still in denial that people cannot afford $1500 per month for a crappy 250 sq. foot studio anymore. There are no jobs that pay well enough for people to pay those prices anymore. Expect for things to get very crazy here in the SF Bay Area in the next couple of years. Expect the unexpected.
     
    #20 simcha, Mar 22, 2009
    Last edited: Mar 22, 2009
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