| Monday, October 08, 2007 |
| 401(k) Loans: At Your Own Risk |
Yikes, this Wall Street Journal article: 401(k) Loans: At Your Own Risk has noted a small uptick in folks taking out 401(k) loans. Though borrowing against your retirement nest egg may seem tempting, it could significantly reduce your savings at retirement and create an expensive tax bill if you can't repay the loan when it is due.
Tom Foster, a national spokesman for Hartford's retirement plans, says that he considered borrowing from his 401(k) when he was saddled for more than a year with an extra mortgage, but decided against it.
"Most Americans see this as a panacea, but instead it erodes time in the market and adds a new payment," he says.
Even a person who pays such a loan back on time, and therefore avoids the 10% penalty, is getting taxed twice, says Bill Arnone, a partner at Ernst & Young LLP -- once when repaying the loan with after-tax dollars, and a second time when the money is withdrawn at retirement.
People who take the loans also lose out on potential retirement earnings while the money isn't invested. Hopefully this increase in 401(k) borrowing is just an aberration and not the beginning of retirement raiding due to adjustable rate mortgages resetting higher. |
| posted by Boston Gal @ 11:32 AM *
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| 7 Comments: |
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I wrote to you a while back about my 403B and my husband's 401K. Thanks to my religously reading PFBs, I'm now with ING for my new 403B provider and my husband has maxed out his 401K.
Next step - stop investing in bonds (I had wanted to get up to $10K in bonds as a safety net, and ended up with more like $13K). Then I want to move my accounts over from Morgan Stanley (the company that doesn't want to talk to you unless you have a minimum amount, to ING, which I've found really helpful. Oh, my ING accounts are administered by ING but invested in other brand mutual funds.
It just goes to show you that if you slice a little off the top for the retirement savings, it isn't really missed that much.
Sarah
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Woo Hoo! Go Sarah!
You are making excellent progress and you are right - once you adjust to the higher retirement contributions the monthly money is not missed all that much - at least not when you watch your retirement savings grow at such a rapid pace!
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Eight years ago I borrowed $10K from my 401K when I bought my first home. The only thing I could afford on the east coast was a fixer upper. I saved enough money for the down payment but needed extra cash for doing some of the urgent repairs. I paid the loan back in 5yrs + interest and my 401K didn't see any major hits. I now have 80% equity in the house and my 401K is over $300K. It was worth the investment.
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I do think that "raiding the 401k" sometimes makes sense. I chose to cash in the 401k to pay for (some) of my rather expensive MBA... That MBA enabled me to more than double my salary and my breakeven is about 4 years including 2 years without salary!
As a foreign national, the student loans available were at 10% or more interest rates. Also, 401k withdrawals for education avoid the 10% withdrawal penalty.
Since I can't claim student loan interest as my income is too high, I think this was a sensible move.
(of course, raiding the 401k to pay for overconsumption of depreciating assets is a different story).
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You can take out the principal you've put into a Roth IRA without penalty.
That may solve the double taxation issue, though not the time/value issue.
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I think as some of the commenters above have mentioned, everyone's situation is different, but I think that the overall message that you are sending is right - keep the retirement assets as retirement assets.
I did take out a 401k loan a few years back. It worked out for me - kind of - in a way that you wouldn't really expect, though. I cashed out at the peak of the stock market and bought back in with my repayments as the market was falling. I did change jobs - and did not have the money to repay the loan, so I did end up having the tax bill - which I am not happy about, nor proud of. The change in jobs more than paid for the tax bill, though - so, in the long run, it about evened out.
I did really need the money, though - I wouldn't have even been able to get to work if I didn't get a new transmission for my car. Now, after years of planning, I have an emergency fund that will solve this problem if it arises again - but, that was not the case at the time.
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I think taking out a 401(k) loan can work in some instances. In other instances it's better to just save your money. Someone was telling me how they're using some of their 401(k) money from a previous employer to do little things that she could have just saved the money for ina few months.
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I wrote to you a while back about my 403B and my husband's 401K. Thanks to my religously reading PFBs, I'm now with ING for my new 403B provider and my husband has maxed out his 401K.
Next step - stop investing in bonds (I had wanted to get up to $10K in bonds as a safety net, and ended up with more like $13K). Then I want to move my accounts over from Morgan Stanley (the company that doesn't want to talk to you unless you have a minimum amount, to ING, which I've found really helpful. Oh, my ING accounts are administered by ING but invested in other brand mutual funds.
It just goes to show you that if you slice a little off the top for the retirement savings, it isn't really missed that much.
Sarah