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It's unfortunate the 401k administrator didn't inform you that you were allowed to deduct up to $10k as a first-time homebuyer from your plan. No loan, no payback required, and no 20% withholding for taxes since this was allowed under the tax code for first-time homebuyers.
They wouldn’t have needed to inform me because I know, but for one I didn’t have 10k to take out at that time anyways and two, I wanted to pay it back with the loan.
Also the WHT penalty is only 10% not 20 and that’s only if I wouldn’t have paid it back.
many do not realize that when they borrow money out that investment is liquidated .... you get a big goose egg on the outstanding balance .... a 401k loan can end up the costliest loan there is .
in effect a 401k loan over the last year that was in a total market fund cost you 22%.
it cost 15% a year on average the last 3 years and 15% yearly the last 5 years.
that is a very high cost to have borrowed money at
I agree, it’s almost always a bad idea. The opportunity cost is huge, and most people use it as a crutch to escape poor spending habits that they didn’t actually addresss. They just use it as a “get out of jail “free” card”
It was just my plan to get off the ground in life since it was the easiest way to save for a house, by doubling my contribution with the 401k match.
It’s the same reason I think home equity loans are so bad. You acquired that equity at a snails pace early in the amortization and you’re giving it back to pay interest on again. IMO, it’s extremely expensive to do that.
They wouldn’t have needed to inform me because I know, but for one I didn’t have 10k to take out at that time anyways and two, I wanted to pay it back with the loan.
Also the WHT penalty is only 10% not 20 and that’s only if I wouldn’t have paid it back.
When you take money from a 401k and not a loan there is a 20% withholding
I"m just getting used to working for the man again, but I fully intend on moving some money from Traditional IRA to the 401K specifically so I can have ready access to an immediate loan if I want one. It's a cheap line of credit in that it doesn't show up on your credit anywhere. But I'd only use it for acquiring a property.
But, I'm also 401K Admin...God Save the Employees. If they actually read the docs they'll see they can take a loan. So far only one has gotten that far.
I"m just getting used to working for the man again, but I fully intend on moving some money from Traditional IRA to the 401K specifically so I can have ready access to an immediate loan if I want one. It's a cheap line of credit in that it doesn't show up on your credit anywhere. But I'd only use it for acquiring a property.
But, I'm also 401K Admin...God Save the Employees. If they actually read the docs they'll see they can take a loan. So far only one has gotten that far.
Cheap line of credit ?
That can be one of the costliest loans you can take since the assets are liquidated to give you the loan .....that loan would have cost 19% in a simple index fund and over 40% this year if in fidelity contra.
That loan cost what you no longer are earning , not to mention any double taxation on the interest you pay yourself which is really just switching pockets and not an actual gain
Last edited by mathjak107; 12-06-2020 at 05:16 PM..
That can be one of the costliest loans you can take since the assets are liquidated to give you the loan .....that loan would have cost 19% in a simple index fund and over 40% this year if in fidelity contra.
That loan cost what you no longer are earning , not to mention any double taxation on the interest you pay yourself which is really just switching pockets and not an actual gain
Come now, you're not going to really argue the average 401K holding is generating 40% are you? Are you going to argue it brings 19%? Would you tell people to expect a 9% return? (That's at least plausible) Whatever number you'd like to realistically use for your opportunity cost, realize it's coefficient factor. Let's use 10%.
My cost is 1.1x. My money before and after is pre-taxation.
Now, I said it has one use. Property acquisition. That has a different equation. Let's say inflation is 3% and the property is breakeven.
1.03x*5. My money is pre capital gain. That's based on 80% borrowed.
1.1x < 1.15x yes? Income Tax Rate > Capital Gains Rate yes?
The kicker is is doing that allows you to then tack on a 2nd deal, because there's no loan showing on your credit to your 401K. After all, it's a Receivable/Payable all in one.
That's a cheap line of credit....if it allows you to buy a property you otherwise would not have been able to acquire. In my case because doing this reduces my check, and in doing so, reduces the consumption my wife thinks she can do...the loan is practically free.
I would agree that in any other situation, it's a losing proposition....but I did specify for property acquisition.
Come now, you're not going to really argue the average 401K holding is generating 40% are you? Are you going to argue it brings 19%? Would you tell people to expect a 9% return? (That's at least plausible) Whatever number you'd like to realistically use for your opportunity cost, realize it's coefficient factor. Let's use 10%.
My cost is 1.1x. My money before and after is pre-taxation.
Now, I said it has one use. Property acquisition. That has a different equation. Let's say inflation is 3% and the property is breakeven.
1.03x*5. My money is pre capital gain. That's based on 80% borrowed.
1.1x < 1.15x yes? Income Tax Rate > Capital Gains Rate yes?
The kicker is is doing that allows you to then tack on a 2nd deal, because there's no loan showing on your credit to your 401K. After all, it's a Receivable/Payable all in one.
That's a cheap line of credit....if it allows you to buy a property you otherwise would not have been able to acquire. In my case because doing this reduces my check, and in doing so, reduces the consumption my wife thinks she can do...the loan is practically free.
I would agree that in any other situation, it's a losing proposition....but I did specify for property acquisition.
the cost is your return , whatever you are in . this year an s&p 500 fund cost you 21 % . that is very popular .
last year that loan cost you 32% .
so yeah it can be very costly .
what you do with the money varies by individual and outcome but if one is invested in equities that is the costs .and it can be the most expensive loan you can get . not to mention lose your job and it is due under normal conditions .
i dont want anyone else here to fail to realize that whatever your investment was in that 401k and whatever it did is your cost to borrow that money and it can be the most costliest source.
are there exceptions ? maybe but for most who think the only cost is paying yourself interest they are quite wrong
Last edited by mathjak107; 12-07-2020 at 03:23 AM..
All my EXPI is held in my 401K. The tax deferred nature of these accounts is really a nice feature. Being able to reinvest money that would otherwise be lost to taxes is nice. Not having to deal with "tax bull****" every year entering gains, losses, etc. is nice.
As for taking a 401K loan I'd rather get a mortgage to buy the house and use the bank's money and keep my own money invested. My next house I will put as little money down as I can and take advantage of low rates. Corporations do this stuff every day. No big deal as long as the debt can be serviced.
I'm skeptical any sort of long term deflation is going to occur so might as well take advantage of using the bank's money as an inflation hedge.
Well, if we're playing BDE....let's look at my 401K loans.
Loan #1. $10K First Time + $20K Loan. Acquired $150K home in 2010. Rented Cash Flow positive nearly immediately. 401K Loans repaid in 8 months, less the $10K. Full mortgage paid off....2016ish? FMV 2020 = $500K with rents for $15.6K a year. Total vacancy - 0 months.
401K repayment was for Loan #2. $50K loan + $5K Deposit for acquisition of $260K home in 2010. Rented Cash Flow positive immediately after $15K of additional fixing to make a duplex. 401K loans repaid in 9 months by switching CC leverage. Approximately $96K of leverage remaining. FMV 2020 = $740K with $51.6K in rents per year.
Loan #3 was for 2 condos of $180 and $195K in 2011. Closed the same month. Again a $50K loan with $5K Deposits on Each. Rented Cash Flow Positive Immediately after <$10K of improvements. 401K Loan carried for 10 months. Today worth $700 and $680K and each rents for $30K a year.
Final 401K loan was in 2012 for my current home. One final crank but only needed $30K and had $50K advanced for $400K home. Today worth $1.1M. 401K paid 8 months later at job switch with final bonus. Floated the cc loans for about 2.5 years before they were all finally dead.
I'm not sure what that ROI is exactly, but I'm pretty sure it's outperformed my 401K/IRA investing....plus I can deduct stuff on my taxes.
Well, if we're playing BDE....let's look at my 401K loans.
Loan #1. $10K First Time + $20K Loan. Acquired $150K home in 2010. Rented Cash Flow positive nearly immediately. 401K Loans repaid in 8 months, less the $10K. Full mortgage paid off....2016ish? FMV 2020 = $500K with rents for $15.6K a year. Total vacancy - 0 months.
401K repayment was for Loan #2. $50K loan + $5K Deposit for acquisition of $260K home in 2010. Rented Cash Flow positive immediately after $15K of additional fixing to make a duplex. 401K loans repaid in 9 months by switching CC leverage. Approximately $96K of leverage remaining. FMV 2020 = $740K with $51.6K in rents per year.
Loan #3 was for 2 condos of $180 and $195K in 2011. Closed the same month. Again a $50K loan with $5K Deposits on Each. Rented Cash Flow Positive Immediately after <$10K of improvements. 401K Loan carried for 10 months. Today worth $700 and $680K and each rents for $30K a year.
Final 401K loan was in 2012 for my current home. One final crank but only needed $30K and had $50K advanced for $400K home. Today worth $1.1M. 401K paid 8 months later at job switch with final bonus. Floated the cc loans for about 2.5 years before they were all finally dead.
I'm not sure what that ROI is exactly, but I'm pretty sure it's outperformed my 401K/IRA investing....plus I can deduct stuff on my taxes.
but again it isnt the loan that is cheap ... it is the investment you bought with it that may have done well .
it is like some people consider a mortgage an inflation hedge and that is incorrect .
the mortgage is neutral ... what you buy with it may be an inflation hedge or it may not .
but with or without the mortgage that asset is going to do what it is going to do regardless of how it is paid for .
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If they actually read the docs they'll see they can take a loan. So far only one has gotten that far.