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Old 07-05-2011, 03:59 PM
Status: "Gather ye rosebuds while ye may" (set 7 days ago)
 
Location: Portland, OR
7,493 posts, read 3,252,915 times
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Is it worth it to borrow against a 401k at a 4% interest rate to pay off a student rate at 6.55%? I'm sure 2.55% spread doesn't mean anything, but being indebted to myself rather than an external entity has some appeal.
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Old 07-05-2011, 04:02 PM
 
Location: Connecticut
2,727 posts, read 2,851,623 times
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Sure, it DOES sound appealing. Just keep in mind, you are getting hit twice. Now when you take the loan out, and again later on when you cash it out.


ETA - knowing that, it's really only a decision you can make
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Old 07-05-2011, 04:03 PM
Status: "Gather ye rosebuds while ye may" (set 7 days ago)
 
Location: Portland, OR
7,493 posts, read 3,252,915 times
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Quote:
Originally Posted by CTGirlNoMore View Post
Sure, it DOES sound appealing. Just keep in mind, you are getting hit twice. Now when you take the loan out, and again later on when you cash it out.


ETA - knowing that, it's really only a decision you can make
Looks like I'm going to have to break excel out tonight
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Old 07-05-2011, 04:05 PM
 
Location: Wartrace,TN
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Remember the tax deductibility of student loan interest.
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Old 07-05-2011, 04:06 PM
 
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Also, I would think about the timing of paying back the loan. If the market goes up between now and the time you pay back the 401k (a high probability), you will lose out on all of that interest. You are going to greatly reduce the amount of time your money will have to compound. If it were me, I wouldn't borrow against my 401k unless there were no other option (e.g., I couldn't afford my payments and I'm about to foreclose or declare bankruptcy).
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Old 07-05-2011, 05:13 PM
 
29,740 posts, read 26,463,503 times
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Quote:
Originally Posted by CTGirlNoMore View Post
Sure, it DOES sound appealing. Just keep in mind, you are getting hit twice. Now when you take the loan out, and again later on when you cash it out.


ETA - knowing that, it's really only a decision you can make
thats not true at all.
thats a suzie ormann white lie so folks are discouraged from taking loans.

no where are you taxed 2x on the loan. the only thing that can be taxed twice is the interest on the loan you pay yourself.

think of it as if you took the money out,said to yourself the next day i dont need it and put it back in. all your doing is replacing the money you took out.

your pay check is always taxed whether you take a bank loan, no loan or a 401 k loan. that fact that your replacing untaxed money you took out still only has you taxed 1 time when you take the money out.

think about it. you make 50k in taxable income and put 10k in a 401k your taxed on 40k no matter what.... you borrow out 5k.... your still taxed on 40k but out of that 40k you have to put the 5k you never paid tax on back. the only time your taxed is when that 10k is drawn out later on in retirement.

i wrote her a few times to stop saying its taxed 2x and confusing people because its not the loan thats taxed twice its only the interest. she never responded.

Last edited by mathjak107; 07-05-2011 at 05:29 PM..
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Old 07-05-2011, 09:50 PM
 
Location: SoCal desert
7,062 posts, read 6,943,048 times
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Quote:
Originally Posted by VTHokieFan View Post
Is it worth it to borrow against a 401k at a 4% interest rate to pay off a student rate at 6.55%? I'm sure 2.55% spread doesn't mean anything, but being indebted to myself rather than an external entity has some appeal.
Good ghod, no.

Do not touch the retirement money.
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Old 07-05-2011, 10:02 PM
 
20,662 posts, read 16,169,349 times
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Quote:
Originally Posted by VTHokieFan View Post
Is it worth it to borrow against a 401k at a 4% interest rate to pay off a student rate at 6.55%? I'm sure 2.55% spread doesn't mean anything, but being indebted to myself rather than an external entity has some appeal.
No. You're almost guaranteed to make 2.55% by just investing your 401k money in CDs or MMs (over the next 5 years). Even more if you play higher risk.
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Old 07-05-2011, 10:23 PM
 
Location: North Metro Atlanta
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your Student loan is tax deductable in a diffent post, your tax rate was in the 25% range. that would make your effictive loan rate ~4.9125 In the time whole you are re-paying the loan you would more then likly make more then 1% spread on your money, in a High div fund.

And you also paided tax on the Cash you are paying back with, and get to pay it again when you pull the money out in 40 yrs,
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Old 07-05-2011, 11:33 PM
 
8,232 posts, read 11,132,901 times
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A few questions for you-->
1. What's your ultimate strategy? Are you trying to borrow to pay off your student loans quickly so you can divert the loan money into retirment savings once it's paid off? Or are you trying to pay off student loans for another reason, like wanting to start saving for a home down payment? If the math works, it *may* not be a terrible idea if your end goal is to increase retirement contributions faster. If your end goal has nothing to do with retirment savings, I don't see how borrowing from your future will do much good in the long run.
2. How much quicker could you pay off the 401k loan than the student loan? Are we talking years or months?
3. How much do you stand to lose by not having that money in your 401k while you're in repayment. For example, if you currently have $10k invested and the market climbs 10%, you've made $1,000. If you borrown $8k to pay off loan and only have $2k left, then you'll only make $200. Was the lower interest rate a good move afterall if you lost the chance to make $800 in the market? Did you save more than $800 in future interest payments on the 6% student loan? Of course, we have no idea where the market will go while you're loan is out. But you could stand to lose a lot more than you gain in 2%ppts of interest savings.

Here's my take on borrowing from 401k's--> DON'T DO IT. EVER. I have these beliefs for 2 reasons:

1. I had to lay off someone who works for me a few months ago. His very first question was "I have a loan against my 401k. How does this layoff impact that?" Turns out our company's 401k plan includes a loan clause that states "loans must be repaid to the account in full upon termination." Even if we didn't have that clause, it would be pretty darn hard to have one more monthly obligation to pay while you are out of work- on top of mortgage, car, etc.

2. Borrowing from your retirement accounts- whether they're "good" reasons (home down payment) or not- is NOT something you want to make a habit of doing. Do not touch it. Do not pass go. Pretend it doesn't exist - and it will be there for you when you eventually need it.
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