Sorry to resurrect and piggyback, but I'm in the same boat. I'm trying to pay down debt as quickly as possible and my 401k loan has me all sorts of conflicted. It's at 3.25% so I'm not freaked out by the interest (only the fact that my money isn't "working"). Mine also needs to be paid back in a lump sum.
I'm contemplating starting a (taxable) offset account at Vanguard. If my loan goes to term and nothing bad happens then I have a nice taxable account. If something unforseen happens and I need to leave my company or just need to pay off the loan for some reason I can use the offset account. The downside, of course, is that a taxable account in VTSAX may lose money. Maybe use Total Bond instead? Just save up and pay off the loan and forget this whole stupid offset account nonsense? lol
Thoughts/advice, anyone?
P.S. I'd still have a cash emergency fund. This offset account would be nothing but a hedge against the 401k loan.
Well since this topic is back up again, I too have a 401k loan that I took out last year when I found myself out of a home and in need of raising about $50,000. I was able to raise
some of the money by selling my car and liquidating stock, but the rest came from a 401k loan. I myself have been living as cheaply as possible to get that loan repaid at the soonest point I can. I see the biggest risk being that I leave my job, voluntarily or otherwise and then need to repay the loan or else lose a bunch of money to penalties, taxes at my marginal rate, and a bunch of money and potential future tax-free gains.
Mine is at 5.25% so you could argue that the motivation to pay is back is more urgent, but you could argue against such logic too. Suppose my 401k loan had a 20% interest rate. Would that really be so bad, considering the interest is paid to myself and 20% would be more than the market returns? As I see it though, the 5.25% I'm earning on my 401k loan's outstanding balance is less than the 7% return of the stock market with reinvested dividends that I think is fair to expect over the next 4+ years of my loan balance. So because of that, I view repayment of the loan as a way to get that money to work at 7% tax-free instead of merely 5.25%.
I think you should view yours the same way. Your money
could be statistically likely to return 7% if it were in the 401k again, but instead you're only getting 3.25% on your money due to the low interest rate of your 401k loan. Meanwhile you've got that low interest rate but also the risk of the tax penalties, loss of opportunity, and so on. You can do whatever's right for you, but for me personally, I'm looking to just repay mine as quickly as I can so the money is safely returned to the 401k tax shelter.