Author Topic: Borrowing from your 401k  (Read 2643 times)

Mephistopheles

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Re: Borrowing from your 401k
« Reply #10 on: May 09, 2019, 12:03:48 PM »
Thanks for the replies. I think what you all are saying is making sense. It's not really worth it to borrow from 401k if that means having to sell down its holdings


My Own Personal Hedge Fun

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Re: Borrowing from your 401k
« Reply #11 on: June 13, 2019, 03:31:31 PM »
My dad has his own small business with 401k plan. He's trying to come up with cash for an upcoming expense and trying to figure the most efficient way to do so. It's basically down to selling stocks in a taxable account (and paying capital gains taxes) vs. borrowing from 401k. I haven't done enough research on the latter but I see that the benefits are:

- He can charge himself a high interest and loophole way of contributing more to a 401k
- No taxes as long as the loan is paid back with interest in the set time frame (5 years is the law)

Since it's his own business, he doesn't have to worry as much about paying back the loan after separation of service (at any rate, since it is his own business then he can make sure his 401k plan states that loan payments may continue as scheduled after separation of service, and have the business cover any fees).

I would simply charge an average interest rate no need to be an outlier and attract attention from the IRS, etc. Obviously it's better not to borrow from a 401k, but I think it's fine as long as it's an isolated event with a clear benefit and low risk of defaulting on the loan. The people who really hurt themselves with these loans are repeat offenders who cost themselves years of compounded returns.

If anyone has ever done this would like to hear your thoughts. Unfortunately we can't borrow against the stocks in the 401k, right? Meaning, he'd have to sell shares to generate cash in order to lend it out to himself; as opposed to it being margin borrowing

Yes. That would be borrowing on margin, which isn't allowed in retirement accounts. He could do a margin loan against securities in a taxable account, but frankly I think a 401k loan is the safer route in terms of a more predictable range of outcomes.