What's the money for? If it's for investing (e.g. the down payment on a rental property) or maybe for renovation (if the house is currently a "tear down" and the changes would allow it to be sold at market rate -- otherwise the ROI is typically negative) then it's a smart plan.
If it's for something else, then yeah, that's stupid.
It's for home renovations on a PRIMARY home that was purchased for over 500k in 2013(now worth around 600k), and CW1(who is mid 30's) doesn't plan on selling any time soon. It's basically to make the home look pretty. At the time of purchase, CW1 borrowed 50k for the down payment from the 401k, and paying back over 15yrs.
That's a large chunk of cash to take out of the market, considering that the home will likely never sell again(forever home). I understand that the 50k will be paid back to the 401k plan over15yrs, but we're talking about paying yourself back @ 4.5% interest with after tax dollars, vs getting the average 10%/yr return for 15yrs on the full 50k amount, had it been left untouched in the 401k . Once in retirement, DW1 will have to pay taxes again on that 50k that was replenished over the 15 yrs with after tax dollars.
This is a common misconception about 401k loans and repayment, but you aren't paying taxes again.
Let's assume you have $50k in your 401k, and also $50k cash. You've already paid your taxes on your cash, it's yours free and clear. You have not paid taxes on the 401k yet, you will when you retire and withdraw it.
Now you take a loan for the full $50k from your 401k. No taxes are withheld. You take the money and put it in your savings acount. You decide not to purchase whatever you were going to purchase with your loan, so you decide to pay it back - you pay it back with the $50k of cash you had before you took the loan. Now you have $50k in the bank, $50k in your 401k, no taxes were withheld, and no taxes are owed (besides the taxes you will owe when you eventually withdraw from your 401k - which you would have owed anyway). You have not been double taxed. Because of the fungibility of money you could have spent any of the money any way you pleased and paid back the 401k with different money, but hopefully this example illustrates that you won't actually be getting double taxed.
Usually a 401k loan charges interest, and you do get double taxed on that amount. If you borrow $50k, and end up paying back $51k because of interest then you have been taxed in the year you earned that extra $1k, plus you will be taxed when that $1k is withdrawn. The original $50k was put in pre-tax, and pulled out (for the loan) pre-tax, so you won't be getting double taxed on that amount.
