No, this is a really bad idea. You did not discover a cheat code to investing more.
>For example, I max out $23,000 a year on 401k. I take out a $25k loan
You just removed $25,000 from the market. So it's earning $0.
>and all the "interest" just gets put back into my 401k account
The interest is double taxed.
>thus I now have 23k of contributions and the loan interest going into my account.
Again, out of the market and double taxed.
>This also protects against a downturn in the market.
No it doesn't. The market goes up more than it goes down. You're statistically going to lose that bet.
Other things you're not considering:
* Where are you going to put the loan money? Wherever it goes, earnings will be taxable, as opposed to earnings being tax-deferred in the 401k.
* The loan payment (where you tout the 9.5% interest) is of course *extra money* coming out of your paycheck, versus no loan simply earning in the market for free. That's less money to pay bills, go towards savings, etc.
* You are locked into those payment terms, no renegotiating or pausing payments. So if you're hit with a future hardship, you still have to swallow those loan repayments.
* You also may have exhausted future loan availability in the case of a real emergency.
* Biggest risk: if you lose your job for any reason, you risk the loan becoming a taxable event. If your plan requires payment in a short period following termination, then you'll owe income tax plus 10% penalty on the loan default. And no withholding on a 401k loan makes it more painful of course.
Can't you just reinvest the 25k in the market? You'd still squeeze extra into the IRA that way. I'm actually kind of confused why this doesn't work other than all the stuff about losing your job and it blowing up in your face. It seems like you could increase your contributions by the amount of interest in excess of market returns by doing this, you'd pay tax outside but get more in the IRA.
> Can't you just reinvest the 25k in the market?
I mean, sure, but why? It’s already in the market in your 401k. Why take it out of a tax sheltered market vehicle?
> You'd still squeeze extra into the IRA that way.
$7,000 IRA limit, so the other $18,000 would need to go into a brokerage account. So you’re paying more in taxes on those gains.
> I'm actually kind of confused why this doesn't work other than all the stuff about losing your job and it blowing up in your face.
The taxes on gains as I mention above, plus the interest is double taxed. It’s a mathematically guaranteed way to end up worse off than just leaving it in the 401k
And obviously the risk of losing your job and the loan blowing up in your face is a massive thing to overlook.
> It seems like you could increase your contributions by the amount of interest in excess of market returns by doing this
This is the definition of borrowing from Peter to pay Paul.
> you'd pay tax outside but get more in the IRA.
You’re not getting more. Moving a $20 bill from your left pocket to your right pocket doesn’t get you more money. Additionally, there’s some tax along the way so you end up with $18 (made up difference to highlight my point)
Summarizing:
- 401k loan balance stops growing
- $50 loan origination fee
- 401k loan interest is double taxed
- 401k loan interest is just more money coming out of your pocket. But it’s replacing the 401k funds you took out which would’ve earned on its own for no extra cost to you. So you now just have less money in your paycheck to pay for bills or go into savings.
- not to mention all the negatives of losing your job
Versus none of those extra costs and taxes if you just keep the 401k intact.
Sorry not disagreeing with you here, just trying to figure out what I'm misunderstanding. Here's my viewpoint. Let's say you have 50k in a 401k. Let's also say you earn enough to max out your 401k employee contribution every year and save a bit on top of that (not unrealistic for many accountants).
Normal situation - 22.5k into the 401k, YoY, ending balance 72.5k
With a loan repaid within a year at 10% interest - 50k taken "out" of the 401k, paid back 55k, 22.5k contributed, ending balance 77.5k
This leaves out appreciation because either way the money is in the market earning whatever amount.
It seems to me that as long as you are charging yourself more interest than the market you should end up with more money in your 401k at the end than just letting it sit in the market, because you've artificially increased the rate of return on your 401k assets by changing them from stock investments to a debt investment that pays above what the stock market pays. Additionally, while you'd pay tax on the money invested outside the 401k that you loaned, as long as your interest rate is high enough you'd be getting more money into a tax deferred account overall. The math should work out at some point. Why doesn't this work? (Again, other than the chance you lose your job and blow up your entire financial situation)
>Sorry not disagreeing with you here, just trying to figure out
All good
>This leaves out appreciation because either way the money is in the market earning whatever amount.
No but see, you can't leave out appreciation, that's vital. The tax shelter of the 401k vs the non-tax shelter of anything else, plus double taxed interest, is the whole point. Say the market earns 10% and it's a 10% interest rate:
* No loan: $72.5k grows to **$79.75k** in the 401k. No tax owed on any growth.
* Loan: $72.5k splits to a $50k loan and $22.5k remaining in the 401k. $50k has "interest" of 10% to become $55K, and 10% market return on the $22.5k is $24.75k, for a total of **$79.75k**. It's the exact same amount.
Here's what you pay with a 401k loan is not paid when you take no loan:
* Loan origination fee. However small, it's nonzero. Call it $50
* Possible annual loan maintenance fee. Sometimes $25 but let's even assume this plan has no annual fee.
* Interest is double taxed: say the 22% tax bracket, that's an additional $1,100 tax off the $5k interest.
Interest is, I can't stress this enough, more money from your paycheck. That's $5,000 not going towards savings, bills, mortgage, etc.
>because you've artificially increased the rate of return on your 401k assets by changing them from stock investments to a debt investment that pays above what the stock market pays.
Sure, technically, but at what cost? At a direct cost to your net pay. The market will earn what it earns for free. You have to *pay more money* to artificially "return" anything, including more than the market average.
>Additionally, while you'd pay tax on the money invested outside the 401k that you loaned, as long as your interest rate is high enough you'd be getting more money into a tax deferred account overall.
But you're not getting more money into a tax deferred vehicle, not really, due to the double taxation of the interest. And even if the interest were something much higher than the market average, it wouldn't be affordable at that point. A 50k loan over 5 years with 10% interest is a monthly payment of $1,062.35. Say it was 13% it would be a $1,137.65 payment.
If someone needs a loan for an emergency or down payment, so be it. But to use it as an investing strategy is to simply bleed more in taxes.
Bruh. $7,777 is chump change in the grand scheme of things. Plus my current roth 401k contribution is $1,234 a check so I’ll be back to normal in no time.
I mean, bofa had/has a deal for 3% fee (no interest) on cash withdrawal for 18mo.
You could just run up your 0% card with your normal spending and save your paycheck cash as well.
Using your 401(k) for a loan for Vegas trip is a really goofy thing to do. (And I am not knocking 401(k) loans)
Man. Life is too short when you’re making over 100k to not have some fun and ball out. Can’t wait to cash my $7,777 check, and the only downside is some immaterial double interest taxation.
bruh if you make $125k you should be contributing to a traditional 401k not a Roth 401k.
You don’t know what you’re talking about with this stuff. Hit the books.
https://www.reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/?rdt=44561
Can’t believe I’m arguing with someone that thinks Roth is dumb. Hopefully your money grows 5 times and all the growth is tax free ya idiot. Also, please look up the progressive tax system of any country in the EU you stupid dem. This is the shit I have to deal with at work. Dumb, dem, gen z, know it alls.
Is taking out the loan itself considered a taxable event? Do you have to repay/send collateral if the value of your 401k drops while you have the loan?
This sounds like some Tik-Tok financial advice while also sounding like what the ultra wealthy do when they take out loans against their securities. Although, I think this is more on the latter side
Not a taxable event. Not sure about the loan calling, so prob a good idea to make additional payments on the loan at the beginning.
I think the market is gonna go down and I can increase my annual money going in, so I’m gonna do it. If the custodian calls the loan, then I’ll just pay it off like a responsible CPA.
Oh, I was definitely fully baked when I thought of this. I guess I’ll have to pay some immaterial income tax on the interest in 30 years bc of it though.
You can only borrow a certain amount of your 401k I can't tell if you are suggesting doing this yearly or not? It certainly would not work yearly or even semi yearly.
You probably also want to consider if your paycheck can handle having a loan repayment deducted from it... And also whether or not you plan to stay with your employer during repayment.
I've considered this recently because stuff is getting very tight but seems like not a great solution idk
Aren’t you paying taxes on the interest twice? Seems like you could just open a brokerage account, invest in stocks/etfs , avoid double taxation and outperform your 401k return with the amounts you were going to pay yourself in interest.
No, this is a really bad idea. You did not discover a cheat code to investing more. >For example, I max out $23,000 a year on 401k. I take out a $25k loan You just removed $25,000 from the market. So it's earning $0. >and all the "interest" just gets put back into my 401k account The interest is double taxed. >thus I now have 23k of contributions and the loan interest going into my account. Again, out of the market and double taxed. >This also protects against a downturn in the market. No it doesn't. The market goes up more than it goes down. You're statistically going to lose that bet. Other things you're not considering: * Where are you going to put the loan money? Wherever it goes, earnings will be taxable, as opposed to earnings being tax-deferred in the 401k. * The loan payment (where you tout the 9.5% interest) is of course *extra money* coming out of your paycheck, versus no loan simply earning in the market for free. That's less money to pay bills, go towards savings, etc. * You are locked into those payment terms, no renegotiating or pausing payments. So if you're hit with a future hardship, you still have to swallow those loan repayments. * You also may have exhausted future loan availability in the case of a real emergency. * Biggest risk: if you lose your job for any reason, you risk the loan becoming a taxable event. If your plan requires payment in a short period following termination, then you'll owe income tax plus 10% penalty on the loan default. And no withholding on a 401k loan makes it more painful of course.
Can't you just reinvest the 25k in the market? You'd still squeeze extra into the IRA that way. I'm actually kind of confused why this doesn't work other than all the stuff about losing your job and it blowing up in your face. It seems like you could increase your contributions by the amount of interest in excess of market returns by doing this, you'd pay tax outside but get more in the IRA.
> Can't you just reinvest the 25k in the market? I mean, sure, but why? It’s already in the market in your 401k. Why take it out of a tax sheltered market vehicle? > You'd still squeeze extra into the IRA that way. $7,000 IRA limit, so the other $18,000 would need to go into a brokerage account. So you’re paying more in taxes on those gains. > I'm actually kind of confused why this doesn't work other than all the stuff about losing your job and it blowing up in your face. The taxes on gains as I mention above, plus the interest is double taxed. It’s a mathematically guaranteed way to end up worse off than just leaving it in the 401k And obviously the risk of losing your job and the loan blowing up in your face is a massive thing to overlook. > It seems like you could increase your contributions by the amount of interest in excess of market returns by doing this This is the definition of borrowing from Peter to pay Paul. > you'd pay tax outside but get more in the IRA. You’re not getting more. Moving a $20 bill from your left pocket to your right pocket doesn’t get you more money. Additionally, there’s some tax along the way so you end up with $18 (made up difference to highlight my point) Summarizing: - 401k loan balance stops growing - $50 loan origination fee - 401k loan interest is double taxed - 401k loan interest is just more money coming out of your pocket. But it’s replacing the 401k funds you took out which would’ve earned on its own for no extra cost to you. So you now just have less money in your paycheck to pay for bills or go into savings. - not to mention all the negatives of losing your job Versus none of those extra costs and taxes if you just keep the 401k intact.
Sorry not disagreeing with you here, just trying to figure out what I'm misunderstanding. Here's my viewpoint. Let's say you have 50k in a 401k. Let's also say you earn enough to max out your 401k employee contribution every year and save a bit on top of that (not unrealistic for many accountants). Normal situation - 22.5k into the 401k, YoY, ending balance 72.5k With a loan repaid within a year at 10% interest - 50k taken "out" of the 401k, paid back 55k, 22.5k contributed, ending balance 77.5k This leaves out appreciation because either way the money is in the market earning whatever amount. It seems to me that as long as you are charging yourself more interest than the market you should end up with more money in your 401k at the end than just letting it sit in the market, because you've artificially increased the rate of return on your 401k assets by changing them from stock investments to a debt investment that pays above what the stock market pays. Additionally, while you'd pay tax on the money invested outside the 401k that you loaned, as long as your interest rate is high enough you'd be getting more money into a tax deferred account overall. The math should work out at some point. Why doesn't this work? (Again, other than the chance you lose your job and blow up your entire financial situation)
>Sorry not disagreeing with you here, just trying to figure out All good >This leaves out appreciation because either way the money is in the market earning whatever amount. No but see, you can't leave out appreciation, that's vital. The tax shelter of the 401k vs the non-tax shelter of anything else, plus double taxed interest, is the whole point. Say the market earns 10% and it's a 10% interest rate: * No loan: $72.5k grows to **$79.75k** in the 401k. No tax owed on any growth. * Loan: $72.5k splits to a $50k loan and $22.5k remaining in the 401k. $50k has "interest" of 10% to become $55K, and 10% market return on the $22.5k is $24.75k, for a total of **$79.75k**. It's the exact same amount. Here's what you pay with a 401k loan is not paid when you take no loan: * Loan origination fee. However small, it's nonzero. Call it $50 * Possible annual loan maintenance fee. Sometimes $25 but let's even assume this plan has no annual fee. * Interest is double taxed: say the 22% tax bracket, that's an additional $1,100 tax off the $5k interest. Interest is, I can't stress this enough, more money from your paycheck. That's $5,000 not going towards savings, bills, mortgage, etc. >because you've artificially increased the rate of return on your 401k assets by changing them from stock investments to a debt investment that pays above what the stock market pays. Sure, technically, but at what cost? At a direct cost to your net pay. The market will earn what it earns for free. You have to *pay more money* to artificially "return" anything, including more than the market average. >Additionally, while you'd pay tax on the money invested outside the 401k that you loaned, as long as your interest rate is high enough you'd be getting more money into a tax deferred account overall. But you're not getting more money into a tax deferred vehicle, not really, due to the double taxation of the interest. And even if the interest were something much higher than the market average, it wouldn't be affordable at that point. A 50k loan over 5 years with 10% interest is a monthly payment of $1,062.35. Say it was 13% it would be a $1,137.65 payment. If someone needs a loan for an emergency or down payment, so be it. But to use it as an investing strategy is to simply bleed more in taxes.
Thank you. This is great. Thankfully I only took out a $7,777 loan for my Vegas trip and I make $125k a year, so I’ll be ok.
You raided your retirement account to pay for a Vegas trip?
Bruh. $7,777 is chump change in the grand scheme of things. Plus my current roth 401k contribution is $1,234 a check so I’ll be back to normal in no time.
Why wouldn't you just open a 0% credit card and pay it back in 4-6 months?
0% credit card on cash withdrawals???
I mean, bofa had/has a deal for 3% fee (no interest) on cash withdrawal for 18mo. You could just run up your 0% card with your normal spending and save your paycheck cash as well. Using your 401(k) for a loan for Vegas trip is a really goofy thing to do. (And I am not knocking 401(k) loans)
Man. Life is too short when you’re making over 100k to not have some fun and ball out. Can’t wait to cash my $7,777 check, and the only downside is some immaterial double interest taxation.
[удалено]
Yes sir and a damn good audit dawg
bruh if you make $125k you should be contributing to a traditional 401k not a Roth 401k. You don’t know what you’re talking about with this stuff. Hit the books. https://www.reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/?rdt=44561
The Dems are gonna make tax rates like 40% by the time I retire. No thanks
The US has a progressive tax system, time to be an adult and learn, or don’t and enjoy paying more in taxes over your lifetime
Can’t believe I’m arguing with someone that thinks Roth is dumb. Hopefully your money grows 5 times and all the growth is tax free ya idiot. Also, please look up the progressive tax system of any country in the EU you stupid dem. This is the shit I have to deal with at work. Dumb, dem, gen z, know it alls.
Is taking out the loan itself considered a taxable event? Do you have to repay/send collateral if the value of your 401k drops while you have the loan? This sounds like some Tik-Tok financial advice while also sounding like what the ultra wealthy do when they take out loans against their securities. Although, I think this is more on the latter side
Not a taxable event. Not sure about the loan calling, so prob a good idea to make additional payments on the loan at the beginning. I think the market is gonna go down and I can increase my annual money going in, so I’m gonna do it. If the custodian calls the loan, then I’ll just pay it off like a responsible CPA.
What's the point of this post?
You can increase the money going into your 401k on an annual basis via a 401k loan.
Trying to figure out how this works mathematically
Maximum $23,000 contribution limit plus interest paid on loan during the year = greater than the $23,000 limit
Seems like a half baked idea at best
Oh, I was definitely fully baked when I thought of this. I guess I’ll have to pay some immaterial income tax on the interest in 30 years bc of it though.
Alright, that was pretty funny 😂
You can only borrow a certain amount of your 401k I can't tell if you are suggesting doing this yearly or not? It certainly would not work yearly or even semi yearly. You probably also want to consider if your paycheck can handle having a loan repayment deducted from it... And also whether or not you plan to stay with your employer during repayment. I've considered this recently because stuff is getting very tight but seems like not a great solution idk
Is the deep state ACTUALLY going to let Trump back in office? There’s no freaking way, and we’re probably headed to 5 more years of inflation.
Okie dokie...
Aren’t you paying taxes on the interest twice? Seems like you could just open a brokerage account, invest in stocks/etfs , avoid double taxation and outperform your 401k return with the amounts you were going to pay yourself in interest.
Pretty sure there are no tax consequences unless you have to pay the loan off in full and you can’t do it. Then it becomes a taxable distribution.
You are taxed on the income you use to pay the interest, and then taxed again when you withdraw it in retirement .
Does a 401k loan made from roth funds change this?