Borrowing from 401K.....to invest in 401K (principle, payroll, implications)
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The OP is not reducing their total tax liability by the total amount of the loan
No one claimed this. The op is actually reducing their taxable income by more than the loan amount.
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, merely attempting to accelerate their 401k contribution to the "ceiling". Reduced pretax wages is what minimizes taxes, not 401k contributions. There is no "credit" applied in such situations.
You do understand that increasing your 401k contribution does in fact reduce your taxable income right? Which directly reduces your current federal income tax liability
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This is easily illustrated by looking at one's pay stubs. This is so basic I am shocked anyoneeven has such a question!
It's clear you are clueless and don't understand the topic being discussed as it is pretty cut and dry
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The only grey area considering 401k loans is "total return until distribution":
The person that takes out the "loan" from their own 401k is also going to replace the cash over the life of the loan. Whether that is one year or longer the issue is that the while their 401k is artificially depleted they will not have the full amount of their funds working for them. If the rate of interest that they paying the loan back is greater than the rate of return of their invested funds there is slight advantage, but they'd eventually be taxed on those "gains" when they begin distributions. If the rate of interest they pay is less than the returns then there is zero advantage.
And you are bringing unknown variables into the equation because you don't understand the basic math behind what's going on. The 401k would only be artificially depleted for 6-8 weeks. You flat out don't understand the math behind it. I laid it out a couple of times and you respond to it complelty ignoring the math
The OP is not reducing their total tax liability by the total amount of the loan,
You got that bit right. The reduction in tax liability is the additional contributions multiplied by the marginal rate. So in the hypothetical being discussed, that is $5000.00 * (.25 + .5) = $1500.00
Hopefully that is the part you were missing and this should clear everything up for you.
It is clear YOU have no capacity to understand the difference between reducing AGI via pretax contributions and nonsense
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Originally Posted by Lowexpectations
...The op is actually reducing their taxable income by more than the loan amount.
...
There is NO credit involved when maximizing the "inflow" to a 401k via a "loan". The only way to reduce tax liability is by reducing ones wages.
If the OP merely asked "would my taxes go down if I increased my 401k CONTRIBUTION" that is easy -- YES IT WOULD. They instead asked if "borrowing from a 401k so they'd be able to cover their expenses makes sense" the answer is not clear and it may result in a worse result depending on the interest paid.
There is NO credit involved when maximizing the "inflow" to a 401k via a "loan". The only way to reduce tax liability is by reducing ones wages.
If the OP merely asked "would my taxes go down if I increased my 401k CONTRIBUTION" that is easy -- YES IT WOULD. They instead asked if "borrowing from a 401k so they'd be able to cover their expenses makes sense" the answer is not clear and it may result in a worse result depending on the interest paid.
Have you been lost the entire thread? The loan would be taken out to allow the op to raise their contribution rate high enough to max their annual limit. Yes taking out the loan and raising their contribution rate would lower their current federal liability
Have you been lost the entire thread? The loan would be taken out to allow the op to raise their contribution rate high enough to max their annual limit. Yes taking out the loan and raising their contribution rate would lower their current federal liability
The LOAN has no valid purpose in terms of taxation. The only thing that impacts tax is reduction in income.
The interest on the loan is paid with AFTER TAX DOLLARS, and effectively results in MORE TOTAL TAXES PAID.
It is impossible to "get ahead" by "borrowing from yourself"!
The LOAN has no valid purpose in terms of taxation. The only thing that impacts tax is reduction in income.
The interest on the loan is paid with AFTER TAX DOLLARS, and effectively results in MORE TOTAL TAXES PAID.
It is impossible to "get ahead" by "borrowing from yourself"!
You tell me what the interest paid would be on a 3500 loan for 1 year
Now tell me what the income tax saved would be by reducing your income by 5k if you are in the 30% marginal rate?
Who or how you borrowed from is only relevant in terms of cost to borrow, your issue with paying back with after tax money isn't the issue you are making it out to be
You keep going back to the same illogical counter without Addressing the math
You tell me what the interest paid would be on a 3500 loan for 1 year
Now tell me what the income tax saved would be by reducing your income by 5k if you are in the 30% marginal rate?
Who or how you borrowed from is only relevant in terms of cost to borrow, your issue with paying back with after tax money isn't the issue you are making it out to be
You keep going back to the same illogical counter without Addressing the math
There is NO MATH that can be used to validate the FICTION that the LOAN is reducing the income tax liability because IT IS NOT THE LOAN that reduces the tax liability! The reduced tax liabiiity is 100% due to less cash coming to some one that puts more PRETAX money aside in their 401k.
If you want to ask a different question, like "what is the cheapest way to borrow money" the answer for that situation depends on the options. If someone is offered a true "zero percent" borrowing opportunity as an incentive on a vehicle they need to purchase or home appliances or some other "deal" that might be a sound way to minimize borrowing costs.
The total taxes, interest, and fees for the entire scenario have not been disclosed and if they were the ONLY QUESTION is not one of taxes but the difference between artificially putting more of one's POST TAX dollars into the 401k potentially being moderately more advantageous then relying on the returns the plan generates through investments.
There is NO MATH that can be used to validate the FICTION that the LOAN is reducing the income tax liability because IT IS NOT THE LOAN that reduces the tax liability!
If you want to ask a different question, like "what is the cheapest way to borrow money" the answer for that situation depends on the options. If someone is offered a true "zero percent" borrowing opportunity as an incentive on a vehicle they need to purchase or home appliances or some other "deal" that might be a sound way to minimize borrowing costs.
You are simply incorrect and your refusal to engage the math behind it is a clear indicator. Again you either don't understand for can't admit to being wrong. You are wrong here even if you don't understand it
Your insistence that there is some "math" shows you have no grasp on the valid calculation.
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Originally Posted by Lowexpectations
You are simply incorrect and your refusal to engage the math behind it is a clear indicator. Again you either don't understand for can't admit to being wrong. You are wrong here even if you don't understand it
Lay out the scenario where TAKING FROM YOUR OWN ASSETS increases one's total net worth? IT IS OF COURSE IMPOSSIBLE!
The situation of a 401k loan being some kind of "magic" is fiction. If the OP wishes to increase the deductions from his paycheck he will of course see more money flow into his 401k but if they simultaneously TAKE OUT A LOAN the total capital invested will be reduced. Thus LESS POTENTIAL FOR GAINS. The plan administrator very likely has a setup fee that will NEVER be recovered. What ever interest the loan carries is being paid back into the account, so that MIGHT be a plus in terms of "gains" but those are undeniably after tax dollars, thus NOT tax advantaged and further UNAVAILABLE for current consumption so in total the "aggregate wealth" of the individual is DECREASED.
Lay out the scenario where TAKING FROM YOUR OWN ASSETS increases one's total net worth? IT IS OF COURSE IMPOSSIBLE!
The situation of a 401k loan being some kind of "magic" is fiction. If the OP wishes to increase the deductions from his paycheck he will of course see more money flow into his 401k but if they simultaneously TAKE OUT A LOAN the total capital invested will be reduced. Thus LESS POTENTIAL FOR GAINS. The plan administrator very likely has a setup fee that will NEVER be recovered. What ever interest the loan carries is being paid back into the account, so that MIGHT be a plus in terms of "gains" but those are undeniably after tax dollars, thus NOT tax advantaged and further UNAVAILABLE for current consumption so in total the "aggregate wealth" of the individual is DECREASED.
I already put the math in front of you multiple times. The interest is minimal and the money would have minimal time out of the market.
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It is clear YOU have no capacity to understand the difference between reducing AGI via pretax contributions and nonsense
