Should You Borrow against your 401(k)? In this video, CERTIFIED FINANCIAL PLANNER™ Professional Colin Exelby discusses this controversial topic.
Some people think 401k loans are great planning tools and others say they are horrible. Which is it?
Have you ever been told never, ever borrow against your 401k? Were you taught
this by your parents? Did some financial advisor tell you that? Did you ask why?
In my opinion, taking a 401k loan or TSP loan can be a good call in certain
situations. Mostly when money is needed quickly and the repayment period is
short. Like an emergency!
Stick with me, and I’ll give you the ins and outs of 401k loans, when it makes the
most sense, and why you shouldn’t follow old, outdated advice!
TIME STAMPS :
00:00 Should you borrow against your 401(k)?
02:51 Ways to take money out of your company retirement plan
03:58 How does the loan work?
05:23 What happens to your investments when you borrow from them?
06:26 How do you pay it back?
08:08 When should you consider using 401(k) funds?
09:23 If you are married and one spouse lost a job….
10:04 Looking to buy a home?
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[About] Colin Exelby is a Certified Financial Planner Professional™ or CFP®. He owns the virtual financial advisory practice Celestial Wealth Management.
I provide financial planning for business owners and their families that makes sense.
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When it comes to saving for retirement, most people rely on their employer-sponsored 401k plan. These plans are designed to help people save for retirement by allowing them to invest a portion of their pre-tax income. However, many people don’t realize that they can take out a loan against their 401k plan. In fact, 401k loans can be a useful tool to help you navigate financial difficulties and achieve your long-term financial goals.
So, how do 401k loans work? Essentially, a 401k loan is a loan taken out against the balance of your 401k plan. You can borrow up to 50% of your vested balance, or $50,000, whichever is less. The money you borrow is usually paid back over five years, with interest rates similar to those of a personal loan. The primary difference between 401k loans and personal loans is that the borrowed amount comes directly from your retirement savings, and you don’t need to have good credit to qualify.
Many people are hesitant to take out loans against their 401k plan because they believe that doing so will hurt their long-term savings. However, 401k loans can be an excellent way to manage immediate financial needs, such as paying off a high-interest credit card or financing a significant purchase. Additionally, unlike traditional loans, 401k loans come with several benefits:
-No credit check: Since the money comes directly from your retirement savings, lenders do not check your credit score, making it easier for people with poor credit scores to borrow money.
-Low-interest rate: While interest rates will vary depending on your plan, 401k loan rates are typically much lower than those of credit cards and personal loans.
-Flexible repayment terms: most 401k loans are repaid over five years, with repayments taken automatically from your paycheck.
-No taxes or penalties: There are no taxes or penalties associated with taking out a 401k loan, provided you pay the loan back on schedule.
It’s important to note that 401k loans should not be taken lightly. While they can be a useful tool, they should only be used in cases of financial emergencies or when all other options have been exhausted. Additionally, if you leave your job before complete repayment of the loan, the remaining balance will be due in a lump sum, and if you fail to pay it, it will be considered a withdrawal and subject to taxes and penalties.
In conclusion, 401k loans can be a useful tool to help you manage financial difficulties while still saving for retirement. While they should be used with caution, taking out a 401k loan can provide you with much-needed financial flexibility and help you achieve your long-term financial goals.
Only way that I can Hedge my 401k from the coming market fall (no safe cash options allowed in the plan so they can collect their fees of course) is to take a LOAN out on it and put the money in 3 month Treasury's at 5% Annualized, repeat. Can pay it back in full at any time if need be.
I'm 60 and withdrew $45,000 to buy a property in the Philippines because that's where I want to retire.
So basically Dave Ramsey is full of shit.
5k in credit card debt, would you take out 401k personal loan to pay off and raise credit score?
I've used a small portions to purchase stocks at their lows.
I took a 401K loan for the down payment on a house 5+ years ago. This was a simple way for the bank to “verify” where the funds came from without having to use bank records and ask about every deposit that wasn’t tied to a paycheck. This helped us avoid the PMI on the loan. We payed back the 401K loan in 6 months (that was the minimum loan repayment option). We poured $$ into our mortgage and t when we got our balance down to $50K, we took out a 401K loan again to pay off our house! We did all of this in 5 years and have since paid off our last 401K loan. Now we own a house, have more cash flow and don’t plan on borrowing any more money as we should be able to pay everything outright.
What about to pay off a mortgage?
I'm taking a $50k 401k loan to fund the rehab of a flip property. I'm expecting to pay off my 401k loan within 6 months (at or around the time I liquidate my flip), so really I'm just protecting my actual cash (checking account) by using short-term low-cost debt…whose handful of loan interest payments are going directly back into my 401k retirement account.
So we took 401k loans to help w down payments on a home . We had not yet sold out other property at the time of the purchase. Now our other house is set to sell .. we will be getting a nice amount of equity from that sale and plan to recast the loan to get a lower monthly payment with the equity proceeds and we were planning to payoff the 401k loans also. But im wondering it we would be better off making payments on the 401k loans and use that extra equity for the recast and drop our mortgage payment even more. Probably would drop it $800/ month
What say you?
I'm considering taking a 401k loan to my my education
thanks!
Thanks, A very informative video. I was exploring 2 options i.e.
1. 'Direct deposit cash Advance' which credit card company offers and they charge 0.00% until Apr 2024(i.e. 16 months to pay off the loan amount) and they charge 4% fee for each transaction.
Ex. If i take 20K as loan, then I pay 800$ as transaction Fee. AND If i fail to pay (Principal 20K + 800(Fee) i.e. Total 20800$) within 16 months, then I have to pay 24.4% APR. THIS Option is ONLY good, if i can pay easily within 16months or earlier. Otherwise, I have to prepare paying high APR i.e. 24.4%.
2. If we take same 20K loan against 401K, then lets say, if i pay 5% as interest, then this 5% will go to my 401K. i.e. Im paying interest to myself ! Here I can pay within period of 5 years. so, 20k(Loan) + 1k (5% Interest) = 21K, So, I will be paying 21K to 401K over the period of 5years(max or earlier). Here i pay service fee upto ~$100 or so. So, this seems to be good option.
I need to find out more info. on 2nd option i.e. 401k loan.
In 2022, 401k took a hit !
Plan to do this Q2 2024 if housing prices are down to the right spot and rates are still through the roof. Focusing on knocking out 50k in debt and am hopeful I’ll be able to do it in the next few months so I can start stacking away as much as possible for my first home.
Question for you: what do you think rates will look like Q2 2024? I know the fed has stated they are adamant about bringing down inflation rates.
Ok so I applied for a 401k loan. I'm young and have been at my company for 12 years. I should have no trouble being approved right since they offer the loan on our investment website? I'm just worried about being denied because I really need the money and soon.
Interest paid back to yourself?? I didn't know that! That's a big deal now that the rates are 4%.
I would borrow to meet 20% down to avoid PMI – but would suck if you lost your job while it isn’t repaid
I have a question please
I already borrowed 50 percent on my 401k for home down payment.. And then another 8k after three months for home renovation… My question.. Can I cash out all my 401 to pay off my credit card but still continue my contribution and this time I have to increase to 22 percent contribution to catch up for my retirement?