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The borrowed moeny not only becomes taxable, but you pay a penalty for early withdrawal (and extra 10% I think). I took a big hit on this once. I did not expect to be changing jobs, but things changes, an opportunity came up. . . .
I recently took out a loan from my 401k to pay off some credit card debt at about 20% + interest. That made sense. But a 5.5% loan - you pay yourself interest on the loan I think mine is set at 5%. My 401k has returned 22.3% for the past year. 10% over the past five years. So while you are paying yourlef 5% on your loan to yourself rather than paying that 5% to someone else, you might do better to invest the same money in your 401k.
Better to take the loans against the equity in his house if he can. you can write off that interest, so it may be a net of as low as 2-3%.
The borrowed money does not become taxable unless you fail to repay. Also projecting your 1 year or 5 year return might not be the best tool to Judge by
8% isn't a modest return to use as an example and the loan could save him some money. You can't simply fabricate things to highlight one side of the equation. Also your example is flawed mathematically because it doesn't account for the funds paying back the loan being invested
The calculator takes into effect the funds paid back. That's why it asks you for the loan term, the interest rate your paying back to yourself and the years to retirement. As you increase the amount you pay yourself back (2.25% vs 5%), the total cost of the loan decreases. Therefore this is taken into effect.
The calculator takes into effect the funds paid back. That's why it asks you for the loan term, the interest rate your paying back to yourself and the years to retirement. As you increase the amount you pay yourself back (2.25% vs 5%), the total cost of the loan decreases. Therefore this is taken into effect.
That's a false premise, the amount you pay yourself back doesn't actually change the cost since you are giving it to yourself and absent the higher interest rate you could have invested more. The calculator also doesn't take into account cash flow savings from what you did with the proceeds of the loan, i.e. Pay off another loan. It's a terribly flawed scare tactic
That's a false premise, the amount you pay yourself back doesn't actually change the cost since you are giving it to yourself and absent the higher interest rate you could have invested more
How would it not? The premise of the total cost of the loan is the "true cost" on returns over a 20, 25, 30 year period. If you paid back the 40l to yourself at 0% interest you are only putting back 40k into the plan. If you paid yourself 2.25%, that is more money going back into the plan that will compound for the next 20, 25, 30 years.
How would it not? The premise of the total cost of the loan is the "true cost" on returns over a 20, 25, 30 year period. If you paid back the 40l to yourself at 0% interest you are only putting back 40k into the plan. If you paid yourself 2.25%, that is more money going back into the plan that will compound for the next 20, 25, 30 years.
It's a false issue. If I paid myself back 1% or 90% interest what bucket of money actually has more does change how much it cost me because all the buckets are mine
It terms of actual cost savings it's 5.5% for the duration of the student loan vs 2.5% for 5 years paid back to yourself. That's an actual savings no factored into the calculation, then adjusted for market returns
The borrowed money does not become taxable unless you fail to repay. Also projecting your 1 year or 5 year return might not be the best tool to Judge by
It becomes taxable if you change jobs unless you happen to have $30,000 laying around unused. If you do not repay the loan entirely before changing jobs (or quitting or getting fired), you have to pay the penalty, then you have include the money as income, which, for me push me further into AMT so you not only pay taxes on it, you lose your deductions. Since I had not anticipated this occurring, I had to borrow money to pay the penalty and taxes on the $33,000 we had taken out to cover moving expenses and some other obligations. So for me that particular loan became a very bad idea.
The current loan is a less bad idea because we paid off credit cards at insanely high interest and we have nearly paid ourselves back the 401K money, so, at this point a penalty and tax would not be very big.
It becomes taxable if you change jobs unless you happen to have $30,000 laying around unused. If you do not repay the loan entirely before changing jobs (or quitting or getting fired), you have to pay the penalty, then you have include the money as income, which, for me push me further into AMT so you not only pay taxes on it, you lose your deductions. Since I had not anticipated this occurring, I had to borrow money to pay the penalty and taxes on the $33,000 we had taken out to cover moving expenses and some other obligations. So for me that particular loan became a very bad idea.
What you are stating is what may happen or happened to which isn't applicable to all. Your initial statement in which I quoted you was incorrect entirely. If you add something else on then the statement is changed. I have 1 year from separation to repay any outstanding loan before mine would become an issue
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The current loan is a less bad idea because we paid off credit cards at insanely high interest and we have nearly paid ourselves back the 401K money, so, at this point a penalty and tax would not be very big.
Again your situation doesn't apply to everyone. Back to your original statement taking out the loan doesn't result in a taxable situation.
It becomes taxable if you change jobs unless you happen to have $30,000 laying around unused. If you do not repay the loan entirely before changing jobs (or quitting or getting fired), you have to pay the penalty, then you have include the money as income, which, for me push me further into AMT so you not only pay taxes on it, you lose your deductions. Since I had not anticipated this occurring, I had to borrow money to pay the penalty and taxes on the $33,000 we had taken out to cover moving expenses and some other obligations. So for me that particular loan became a very bad idea.
The current loan is a less bad idea because we paid off credit cards at insanely high interest and we have nearly paid ourselves back the 401K money, so, at this point a penalty and tax would not be very big.
He’s been a fed for over ten years (a few different agencies) and doesn’t have plans to leave the federal govt for t least another 15 years. Most feds don’t leave until they retire to max their pension. And getting fired? I guess it’s possible, but unlikely.
If your friend loses his job within 5 years and the money isn't paid back, do they have to pay the remaining balance in full? I believe that is a fairly common practice and thus why it's risky.
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