The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: LurkingMustache on February 09, 2017, 10:46:57 AM
-
I had a random idea today and wanted to get feedback. I can withdraw up to 50k of my 401k as a loan. I could use this to pay off a low interest car note, or a downpaynent on an investment property. The loan repayment amount per month would actually be less than my current car payment. AND the loan charges a 4.75% interest rate that would be paid back into my investment account, so my interest would be paying myself vs a bank.
I will probably receive a 26k bonus from my regular job this year. I was thinking off raising my 401k contribution to 50% of this to quickly offset the loan amount and to not lose time in the market, while then also paying the 401k loan to contribute more after tax as a "catch up".
Does anyone see an issue with this? Is there something I'm missing? It seems like it would be better to do this in places where you could reduce any type of cash owed to a bank whether it be for investments or debt -- regardless of interest rate -- if the cash you would be replacing it with is interest paid to you.
-
Hell No! Gotta run, more later.
-
No!! Just pay off your current car loan with the bonus money.
1. You pay back the loans with after tax dollars -- essentially leading to double taxation
2. You have to pay it back immediately (of very quickly thereafter) if you lose your job
3. 401K loans are very expensive in the long run! Check out the links below
https://www.brightscope.com/financial-planning/advice/article/3008/The-Big-Downside-Of-401K-Loans-No-One-Talks-About/
http://www.marketwatch.com/story/that-401k-loan-may-cost-more-than-you-realize-2011-10-06
http://www.investopedia.com/articles/retirement/06/eightreasons401k.asp
-
Just to address the "having to pay back immediately if you lose your job", that isn't true if you have Vanguard. You do have to continue making payments to it, but a former co-worker left last year (took out a 401K loan to buy his house) and Vanguard allowed him to continue with his regular payments. Not sure if this is a special case or not, but it is not an absolute truth. Obviously something to confirm if you do go through with it (for the record I wouldn't).
We took out 401K loans when we bought our house 4 years ago. We had to carry two houses at once and should have paid them back when the old house sold, but it was very pre-MMM days for us, and instead we put in a pool. We love the pool and all, but we should have paid off the damn loans ASAP instead. Big regret!! It is our only non-mortgage debt and a big source of stress. We have made some adjustments and are treating the loans as "hair on fire" debt now. I would only use a 401K loan as a last resort.