Why 401(k) Loans SUCK.
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Why 401(k) Loans SUCK
Taking out a loan from your 401(k) may seem like a convenient option when you find yourself in need of quick cash. After all, it’s your money, right? However, there are several reasons why borrowing from your 401(k) should be a last resort. Here are some of the most significant drawbacks of 401(k) loans:
1. Loss of potential growth: When you take money out of your 401(k), you’re not just borrowing from yourself; you’re also taking away the opportunity for that money to grow through investments. This can have a significant impact on your long-term savings and retirement plans. Even if you repay the loan with interest, you may miss out on potential gains in the market.
2. Double taxation: When you repay the loan, you do so with after-tax dollars. Then, when you eventually withdraw the money in retirement, you’ll be taxed on it again. This means that you’re essentially paying taxes twice on the same money.
3. Risk of default: If you leave your job for any reason while you have an outstanding 401(k) loan, you may be required to repay the full balance within a short period of time, typically 60 days. If you’re unable to do so, the remaining balance will be treated as a distribution and subjected to taxes and penalties.
4. Fees and interest: Most 401(k) loans come with fees and interest that can eat into your savings. These costs can vary depending on your plan, but they can make the loan even more expensive than it initially appears.
5. Limited contributions: While you have an outstanding 401(k) loan, you may be prohibited from making contributions to your account. This means you’ll miss out on the opportunity to take advantage of employer matching contributions and tax-deferred growth.
6. Potential for a smaller retirement nest egg: By withdrawing funds from your 401(k) for non-retirement purposes, you’re effectively reducing the amount of money available to you in retirement. This can force you to work longer or rely on other sources of income.
In summary, while a 401(k) loan can provide short-term relief, the long-term consequences are often not worth it. Before tapping into your retirement savings, consider exploring other options such as personal loans, home equity loans, or cutting expenses. It’s important to carefully weigh the pros and cons and seek advice from a financial planner before making a decision that could impact your future financial security.
Nobody can become financially successful over night. They put in background work but we tend to see the finished part. Fear is a dangerous component, hindering us from taking bold steps we need in other to reach our goals.
I've run the numbers… Taking a loan out of your 401k gives you an 8% return on avoiding PMI. Obviously not as good as the stock market, but I'll take 8% all day!
about 70% my army of soldiers are dead. should have taken a loan
I'm sorry but I'm afraid I have to accuse Beaux of a math crime here. His "what's bad" and "what's worse" comments contradict each other. Let me explain: he says you're not "really" earning that 5% on that loan because you're paying down principle. That's true, but it leaves out the HUGELY important detail that it's not earning the full 5% because some of that money is going BACK into your all important army of dollars! 401k loans are not necessarily good or bad, it depends on the situation but the most important thing when you take one is that you consider your positions as both the borrower and the lender and make sure you're comfortable with both
If you have like toxic debt credit card 17 to 26%
You still need to take a loan out. Yes you will pay interest, duh. Same as any other loan. Yes you will reduce the 401k in the acct but so does a bear market.
Hello guys,
In your example of soldiers. What if you took out a loan at the peak of the market? Would you get a higher return paying the loan through a bear market?
I cannot find it anywhere on the internet on how your money gets invested when you are repaying the loan.
Several years ago a ffriend of mine killed his 401k to pay off some large credit card bill debt he’d gotten himself into. At the time he laughed off my concerns. A couple years later he told me he regretted his decision and now I find myself trying to tell him he still has time to save for retirement (he’s mid-forties) because he sounds like he’s in a depression.
I would have to completely disagree, they break down the entirety of the loan so you have a good idea of the “cost” to borrow that money. So if you’re investing that money into something advantageous you’ll be fine. If you’re paying off high interest loans it’s more beneficial. There are ways to properly use your 401k as a bank to yourself.
Hard to get personal loans under 9% if you can pay it off in a year than I don’t see much issues
Take a loan out at the top. Hmm. Maybe
I've borrowed from my 401k a few times and was able to pay it all back w out a problem, granted I've currently have been w my job for almost 11yrs and I don't plan on going anywhere, so any future loan i may take I have no worries ….
Great Stuff. I started watching your videos last year as a beginner before giving stock market a trial. I was able to make $972,000 within 3 Months with a capital of $200,000. keep it up!
The Solo 401K is an amazing tool. You guys are way over the top here.
NICE VIDEO, I REALIZED THAT THE SECRETE TO MAKING A MILLION IS SAVING FOR A BETTER INVESTMENT. I ALWAYS TELL MYSELF I DON'T NEED A NEW MASERATI OR AN EXPENSIVE VACATION JUST YET. THAT SINGLE MINDSET HELPED ME MAKE MORE MONEY INVESTING. I MAKE STEADY WEEKLY PROFIT. THIS IS NOT MY MONTHLY PAY, DID I FAIL TO ADD THAT, I ALSO WORK? IT IS GOOD TO HAVE MORE THAN ONE STREAM OF INCOME.
I borrowed 401k money to purchase my first condo decades ago. I was able to avoid PMI by having 20% down. Otherwise, I would have not been able to afford the condo and continued renting. Decades later, I have no regrets and firmly believe that this was a good decision. Borrowing 401k money for a house down payment is not much different than choosing a REIT option within a 401k — just money working for a different investment type. Usually they have very good advice, but this video piled on the bad advice — and insulted intelligence by comparing a house down payment to paying cash for a F-150 pick-up. Apples and oranges and they know better.
im taking a 401k loan out to pay for night vision. That is a pretty good reason to me.
the dollar is going to collapse anyways… so get the money while you can.
I did that probablywould be a millionare if i wouldn'thavedone that
How about taking out $6k 401k loan and pay it back within a year and put that cash into Roth. Then you have the money working double time all year.
Normally I'd agree with this, but I did this and then immediately paid it off with the proceeds of our sold home (had some leftover) a few months later.
It worked really well to bridge the gap. I have the TSP, which is generally favorable for things like this.
All of your points re. the 401(k) loan are either outright incorrect, or the negative outcome depends on the "borrower" acting stupid, a very real possibility.
* Incorrect: Interest. You do pay yourself interest. It most definitely is the 4% to 5% (or whatever the rate). Of course it is amortized, and it is amortized with the stated rate.
* Incorrect/stupid behavior: Taking a 401(k) loan is just like your 401(k) investing in a bond. Your 401(k) makes a loan every time you "invest" in a bond. In this case the borrower is you. Are you good for it? My 401(k) cannot get a better 6% bond than by lending to me.
* Stupid behavior: Soldiers, really? It just asset allocation. What asset allocation do you want in your 401(k)? You might or might not allow your 401(k) to go more towards bonds, but that better be your plan. Further, what do you do with the money after you borrow it? I invested it. I'm still over 70% stock and might retire any time. Maybe that 30% "off the table" is too much?
* Stupid behavior: Better know the terms of ANY loan and be prepared. My current 401(k) requires paying a loan immediately on termination of employment. My previous employer did not. It's all part of the terms.
A 401(k) loan may be a smart choice. It depends on the borrower. Your incorrect knowledge and preconceived bias should not eliminate a useful tool.
I never hear anybody talk about the worst thing about taking a loan out of your 401k when you pay the money back you pay it with tax money then when you retire you take the money out and it gets taxed against your pay double the taxes
I don’t think this was a fair comparison of the alternatives. 401k loans are often the only way for most people to get a down payment, get a higher down payment for a lower interest, and/or avoid the dreaded PMI. The alternative is to save the large sum of money in the bank for years where it is not working at all for you for a long time. Also, delaying home buying because the lack of a large enough down payment often keeps people renting when they could be owning. I know it’s risky with the reasons stated above but the alternatives should be stated before making them out like payday loans. Always appreciate your videos guys!
Do the same principles apply to regular, non-tax advantaged, brokerage accounts and security-backed lending? The sales pitch is usually "access your capital without losing out on market increases as well as not creating a taxable event". I'm sure like all tools, there is a right way and a wrong way to use it. It'd be cool to see y'all cover this topic. Love the show.
I'm not sure what he is talking about with the interest. I would need numbers. There are principle, interest, and fees. You only lose the fees. Your army of dollar bills is just "at ease". Taking out a loan just before the stock market tanks can preserve money. Better to pay yourself interest than taking out a high-interest bank loan or credit card. I get the other danger of paying penalty and interest if you leave your employer. That is a risk.
If you have to take a loan, is getting a cash out refi from your home equity a good idea because the interest rate is so low now? I think so but just wanted to confirm w/ you guys.
Borrowing from a 401k or any other retirement plan for a down payment on a house is really a bad idea. It will just put you into more debt further penalizing you from building wealth through saving and investing and if you have to borrow for a down payment on a house, this could be an indicator that you can't afford the house.
I don't think anybody should be left out when going for digital assets
All loans suck
Taking out a 401k loan for an investment is not bad also not all 401k will require you to payback in 2 months before treating the balance as a distribution some plans allow you to paid it back over time just like a regular loan if separated from their job. 401k loan can be an efficient way to build wealth you just have to be smart and do the analysis yes I know there is opportunity cost to consider but do the analysis.
Can you do a segment about pension loans? As a state employee they are offering 5.75% interest but I feel like it doesn't take away from your troops like a 401k loan would
While I would never be in this situation, as I only buy things I can afford.. I would pay down the 401k loan. You want to get that money working for you again, and not have a possible surprise bill or handcuffs if you have a good job opportunity.
I like to keep my 401k loan untapped so it is available as an emergency fund
You got pay some guy interest to borrow your own money. That's so stupid.
It depends on your 401K whether you get to keep your loan after leaving service. A lot will let you keep the loan with your retirement provider
How about the fact this fellow apparently has no cash for even a 5% down payment, and decided to buy a $900k home and then scuffed his 401k in the process.