Comments on: 7 Reasons Why Borrowing From Your 401k is Bad, Bad, Bad!

By: Julian Malins

Julian Malins — Thu, 10 Nov 2011 10:13:47 +0000

I have a considerable amount of credit card debt (amassed over the years from various unfortunate events; no new debt in the last 6 years!) and am on the edge of looking into bankruptcy relief. However, I have a substantial 401k account. I have been with my employer for several years and feel my job is fairly stable. I’m considering taking out small loans and repaying them back in short periods of time and applying the loans towards paying off my unsecured debt. The low interest (paid to me) and the scheduled repayment makes it a very enticing option. I’m 35 and feel I still have time to make up the loss in retirement money. Can you comment on my situation? I’d appreciate your opinion.

By: steve

steve — Mon, 19 Sep 2011 18:30:20 +0000

I disagree – there is value in the loan. I have diligently tracked my 401k for a over a decade – there is less in 401k than I have contributed. so the “in the longterm it will work out” seems to me to be a lie. I have actually found that making my 401k contribution pre tax, and annually pulling money (a small set amount that I pay back in 1 year, has helped in the last 2 years. I am paying myself interest and using the money to fund my personal portfolio. in the event of a departure I can sell my stock to pay back any loan, and my personal rate of return over the last 2 years is almost 30%. while my large 401k balance continues to lose money. This strategy is not for everyone and requires carefully planning and monitoring and yes has some risk. I just find it humurous that I can grow my portfolio and yet the “experts” that manage funds for a living make huge salaries and bonus money, while I am not getting a return. I truly do not expect to have any more in my 401k when I retire than what I put in there (and I am hoping there will be at least that much.)

By: Joe S.

Joe S. — Wed, 17 Aug 2011 21:19:13 +0000

I hope someone can respond with comments on this – I disagree with the article about double-taxation. You contribute to the 401(k) with pre-tax dollars. The money sits in your account and grows, tax-free, until you start to draw it out at retirement. Any withdrawals you take are subject to tax.

401(k) loans are paid off by after-tax dollars, and then when you withdraw money at retirement, you are taxed on the “loan amount again”. Ummm…not really…? You borrowed money from yourself and paid it back with after-tax dollars – correct, but there is no tax effect on the loan amount if you paid it off in full before retirement. The whole double-taxation point is incorrect, in my opinion. If you borrowed money through any other kind of loan, you would pay that off with after-tax dollars as well…so I don’t understand the point.

By: d original

d original — Fri, 27 May 2011 16:59:40 +0000

I have a question I owe the IRS and I was offered by my 401K plan that I have 5000.00 that I can remove that is not a loan it is just my money. I do however have to pay the taxes and use the amount I take as income for next year. Would it be better to make payment arrangments with the IRS and pay there intrest and penalties or to take the necessary amount less the 25% taxes they withdraw even before you get the check and pay the IRS off? If I take the 1000.00 I will have to add it as income next year. Please can someone advise the better move.. I have never owed the IRS and im scared to death
Thank’s

By: Eric

Eric — Sun, 30 Jan 2011 04:36:13 +0000

You do not need to pay back right away. You can set up
Eft withdraws from your own bank account
with your 401k plan administrator. I have been doing that for the past 7 months.

By: Kelly

Kelly — Sat, 01 Jan 2011 18:19:38 +0000

Sybil, they do not run your credit score to take a loan out of your 401k……if your companies plan offers loan options then it doesn’t matter your circumstances to take the loan. My husband and I used a 401 k loan to pay off a lot of outstanding debt to get us out of a bad situation…..and we obviously had bad scores at the time. Thankfully we got our outstanding debts completely paid off and now have great scores. The reason they didn’t care what our score was is that the loan is being paid back automatically out of my husbands pay check…..so in other words about $100 is taken out of his check every other week. With the interest rate very low and with him paying it back the way he is it will be like we never borrowed it at all. Also there was no other way we could get the debts paid like they were due to high interest rates. We were people who made mistakes in our early 20′s with some credit cards but live responsibly now in our 30′s…..it was the right choice for our family and we are very thankful we were able to do it.

By: Sybil Venhorst

Sybil Venhorst — Sun, 14 Nov 2010 20:28:55 +0000

If they actually approve the application, I’d be surprised if they offered more than $250-$300. That’s pretty much their limit on "low score" applicants.

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By: Jim A.

Jim A. — Thu, 10 Jul 2008 15:06:51 +0000

I will just say that it worked out really well for me. I borrowed against my 401(k) for a downpayment on a house in 1999. I paid it off in full in 2003 when I refinanced into a 15 year fixed. So the earnings that I gave up were negative. The rate (4.875%) was less than my mortgage. Because the 401k loan that I used was NOT secured by the property, I never had to pay a day of mortgage insurance. So it’s a gamble that worked out very well for me.