When we hear about someone taking a loan from their 401k, it is almost always followed by a negative reaction of some sort. This video discusses why it is a bad idea to take a loan from a 401k and also highlights some of the exceptions to the rule.
The video also debunks a common 401k loan myth that is put forward as a reason to avoid taking out the loan and identified the true reason that myth exists.
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Is the Schmidt list a real thing? The blooper had me wondering.
GREAT information! The title of this video says it all ! It is a good reply to some of the reasons some have stated below that were beneficial reasons. Some successes were just due to blind market timing & hitting it right, proved to be successful. I found a lot do not pay back the loan and have a distribution and taxable event; & now have depleted their retirement account. In my 40+ year career in the finance industry I had far more clients regret borrowing against their retirement accounts at a later date, than "win". Each would be a case by case situation; but overall there are far more losers than winners with my client IMHO.
If you borrow money prior to this major downturn, and are paying yourself back throughout this chaos weekly, you will certainly make out MUCH BETTER in the long run.
Love the bloopers
Well, my loan is my best return in this market.
I have pretty sizable 403b savings and 7 or 8 years ago, we borrowed up to a total of about $40K to help us come up with down payments on investment properties. We paid them off within 3-4 years and paid net 3% interest on the loans ( and, of course, we had opportunity costs in that the money borrowed wasn’t earning money in the market). Nevertheless, the return on equity on the rental properties FAR exceeded the sum of the interest and opportunity costs. Throughout the loan period, we were still maxing out our contributions to the retirement (403b) account. Overall, the loan enabled us to build a third income leg in my upcoming retirement. We’ll have Soc. Sec., rent from the homes we bought, AND funds from our 403b accounts (albeit slightly reduced from loss of growth due to the 3-4 year loan period). We came out WAY ahead.
Caveat: I have a very secure job – tenured faculty position. So job security is high.
Would it be a bad idea to buy and use saving bonds? Since the government bonds, you can buy serials I or EE and use them in the future. I was told that you can buy them online from treasurydirect,gov, and serial I was the best one to buy.
I would rather live in a van down by the river before I violated the sanctity of my retirement accounts before retirement…of course I'd outfit it with solar, A/C, a wet bath with a composting toilet, a flat screen and spend my days fishing, swimming, and having a grand old time. I've got a $35 Timex that I don't wear much anymore because I've got a flip phone that has the time, alarm and a calendar.
I agree I took out a $30k down payment loan for my home but..my plan is to retire at full retirement age which would put me at a better than rent situation and tax advantages so I will decide what the next step is at that time.Super video !Thanks
I took loans during the 2007 stupidity. As I repayed my loan everywhere the stocks were dropping . I was using dollar cost averages to grow shares. When market started to recover, those cheaper shares helped grow my portfolio. Learn how to make things work for you instead of listening to people tell you it's a bad thing.
I borrowed because I was buying a house. I was also selling a house, and the sale more than covered the purchase, but in the meantime, all the fees were running down my savings. It turned out that I didn't need the loan after all, and I paid it back within a month, but I felt better with the extra money as a cushion.
I have borrowed from my retirement funds twice.
First time a 15K borrow to pay for a new roof on the 4 unit rental I lived in, a capital improvement. The loan from/to myself was set at 10% between rental income and my full time job pay back was easy and I got the interest rather then a bank.
The second time was a 40K parking of funds into a bank account from retirement funds to cover a down payment so the underwriters would approve my financing of a property I wanted to buy..
I had no cash on hand but I did have 40K borrowable from my retirement funds and I had a much larger Line of Credit so I parked the 40K in the Bank account , the loan was approved, moved the 40K back (withen 60 days) and used the Line of credit for the down payment on a new to me rental property.
Everything paid off .. stale equity in retirement funds and real-estate was utilized and capital improvements and new property was achieved.
It's always better to borrow money from yourself. It's best when you expect a market downturn, like when Joe Biden got put in office. I don't think we have seen the bottom yet.
I have a managed 401k account. So far this year, my genius managers have "gained" me minus 9 percent on the year with their investment choices. If I get a 401 loan, I'm paying myself back, 4% interest. That sounds a hell of a lot better than –9% That said, I'm sure I'm not fully aware of all the facts, so I'd like to hear why my logic is wrong on that.
That balloon repayment if you lose your job was the main thing that kept me from borrowing.
What about the stock market tanking and the trillions of dollars that are lost every week from us poor saps that are relying on 401k to retire
If I can choose whose Schmidt List I'm on, it would certainly be yours.
My HVAC went bad and I needed to take out a $3,500 loan from my 401k to pay to replace it because I didn’t have enough cash on hand. Since then my 401k’s value has dropped, meaning repaying the loan and paying interest is better than leaving the money in my 401k and taking a personal loan out would have been.
If my 401k had been growing I would have taken out a personal loan instead of borrowing from my 401k. I only did it because the economy is bad and my 401k’s value is going down. I’ll have the loan paid back before the markets start growing again.
Many of these negatives are not relevant on a Roth 401(k).
And I loved the "schoopers"!
Please speak on just taking a lump sum out ( when market recovers of course), say to pay off a mortgage & be debt free before retirement ?
Could you please do a video on how and where to save money for medical expenses beyond long term care insurance. Thank you
Used them for years Mr Schmidt and remember initially it was tax deductiable when you took it out!.
My wife and I both did this for a home remodel. My retirement was not in a 401k, so I "took the tax hit" and paid the taxes on my withdrawl. Hers was a 401k and she's going to be able to pay it all back in 3 years. Why we did it. We didn't want to take out a loan with the bank. Because the bank loan "front loads" the intererst portion (vs. the principle portion), we would have had to pay tons of interest by the time we'd have been able to pay the loan back. No regrets…
A 401(k) loan is not desirable, but compared with other debt you might be stuck with it might make sense. If you find yourself stuck with high-interest debt (e.g. credit cards)… would you rather be paying the interest back to yourself, or Visa? I used this successfully to pull my "younger" self back to a more stable financial position. But I was very careful to keep the 401(k) loan to less than 10% of my balance, and keep the payment time short (3 years).
I have a friend who used it for the entire down payment of his house, and he got hosed. It's like having two mortgages, one on the house and another on your down payment. THEN he lost his job, and they wanted the whole amount payed back in 60 days. Not good.
Good video- 2022 is a lousy year to retire! Keep up the good work.
I took a loan from my 403b a few years ago to pay off student loans and it was one of the biggest financial mistakes of my life because it negatively impacted future compound growth and that can never be recovered, no matter how much I contribute in the future. Lesson learned.
Don't know if we made the right call here or not, but in 2008, me an the wife had a 401 that kept losing money, so we closed it out, an payed the penalty, an invested in some raw land real-estate, that has gone up in value. Not sure of the percentage, but its still going up, an I hung around for the bloopers. Thx for the vid Geoff. P.S. I like the hand signal for a rock an roll lifestyle, lol
What if the market is up and been up for a decade and you are worried about a correction and would like to protect your account? Could you take out a loan, pay yourself 7% interest basically insuring a return, would it be a good idea then? But, I do feel that borrowing against your 401K is robbing your future self.
You didn't say anything about avoiding mortgage insurance because you put more money down. That's what I did in '93 when I purchased the house I'm in now. PMI was about $50 per month back then. Paid the loan back on my 401k early and paid my house off in 2017.
Love the bloopers at the end. And as always, great info!
I would have delivered pizza before taking out a loan against my 401k. Fortunately, I didn't have to.
Beware of Roger Snyder. He has 6 Subscribers and no videos. Sounds scammy to me.
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I’m sure every point you just made was absolutely correct, but sometimes when you have no options you need to do what you need to do. And the way that money 401(k)s are currently crashing if you take money out of that you’re probably getting a better return paying your self interest
I've been on your Schmidt list for a couple years and I didn't even realize it. I approve.
Once I had to take a 401k loan. Wasn't something I wanted to do. But it wasn't good times, so had to make the best of it. Under the circumstances would do it again. Now far past those times.
401K loan repayment is governed by the plan details. Not all of them require immediate repayment if laid off. At my former employer, if a person got laid off their job or otherwise left, only a borrower who had previously defaulted on a loan had to pay it back right away. If you had no prior default, you could pay it back on the original repayment plan.
He is a human after all, not an avatar. Schloopers are good.
I would have watched until the end anyway, but the outtakes sweetened the pot.
From the perspective of your 401(k), a loan is the same as a bond. A bond is lending money to government or company, while a loan is lending money to the beneficial owner of the 401(k). With that in mind, if you rebalance to maintain your asset allocation while accounting for the loan, then you don't miss out on any growth and in fact your loan may be the best paying bond your 401(k) can get.
Fun out takes.
Geoffrey is at it again! I am inspired by his channel. Geoffrey inspires me to continue my own YouTube channel on Finance and Investing.