Comments on: 401(k) Loan bad for your (financial) health? http://www.joetaxpayer.com/401k-loan/ Financial Commentary For The Average Joe Mon, 06 Feb 2012 21:56:17 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: JOE http://www.joetaxpayer.com/401k-loan/comment-page-1/#comment-212 JOE Tue, 13 May 2008 02:33:21 +0000 http://www.blog.joetaxpayer.com/?p=147#comment-212 JAL - your (1) was correct - I reread the article, and it stated "assuming contributions stop for the life of the loan as usually occurs". My bad. The math is correct even if that assumption is not. I will add a footnote to the post. Joe JAL – your (1) was correct – I reread the article, and it stated “assuming contributions stop for the life of the loan as usually occurs”. My bad. The math is correct even if that assumption is not. I will add a footnote to the post.
Joe

]]> By: JAL http://www.joetaxpayer.com/401k-loan/comment-page-1/#comment-211 JAL Tue, 13 May 2008 01:39:26 +0000 http://www.blog.joetaxpayer.com/?p=147#comment-211 Joe, I agree that on the face of it the T. Rowe Price math just doesn't work out, so the devil must be in the details. After reading your post I also Googled looking for the study but only found several articles quoting T. Rowe Price employees. Borrowing against a 401(k) seems like such a terrible idea to me, I almost hate to see it being discussed. Very thought provoking post. :) JAL Joe,

I agree that on the face of it the T. Rowe Price math just doesn’t work out, so the devil must be in the details. After reading your post I also Googled looking for the study but only found several articles quoting T. Rowe Price employees.

Borrowing against a 401(k) seems like such a terrible idea to me, I almost hate to see it being discussed. Very thought provoking post. :)

JAL

]]> By: JOE http://www.joetaxpayer.com/401k-loan/comment-page-1/#comment-210 JOE Mon, 12 May 2008 20:51:33 +0000 http://www.blog.joetaxpayer.com/?p=147#comment-210 JAL - Is (1) true? I know that after a hardship withdrawal there's a period you may not make deposits, but was unaware that a company may use an outstanding loan o do this. Considering home loans ar allowed a 10 yr payoff, that would be horrible, indeed. If that's the assumption, it should be spelled out. (2) absolutely true. Part of the risk in taking out the loan. No argument there. (3) again, agreed. As I suggest to Carrie, the use of such a loan should be well thought out, and only when the numbers are compelling. I googled a bit to find the T Rowe price study, and failed. I still believe there was a typo somewhere. JAL -
Is (1) true? I know that after a hardship withdrawal there’s a period you may not make deposits, but was unaware that a company may use an outstanding loan o do this. Considering home loans ar allowed a 10 yr payoff, that would be horrible, indeed. If that’s the assumption, it should be spelled out.
(2) absolutely true. Part of the risk in taking out the loan. No argument there.
(3) again, agreed. As I suggest to Carrie, the use of such a loan should be well thought out, and only when the numbers are compelling.

I googled a bit to find the T Rowe price study, and failed. I still believe there was a typo somewhere.

]]> By: JAL http://www.joetaxpayer.com/401k-loan/comment-page-1/#comment-209 JAL Mon, 12 May 2008 18:50:33 +0000 http://www.blog.joetaxpayer.com/?p=147#comment-209 Joe, That's an excellent point about there being no absolutes with things related to finance. How true! But as far as 401(k) loans go... Without being able to see the T. Rowe Price study to verify their numbers, possibly they factored in one or more of the traps a 401(k) borrower could fall into? 1. Some plans forbid contributions to your 401(k) when a loan is outstanding. The negative impact on the future value of the 401(k) should be painfully obvious... you not only lose out on the interest, but you lose out on any company matching. 2. If you change jobs, the entire loan balance is immediately due. If you can't pay it back right then, it's considered a taxable withdrawal and future tax-deferred interest on that money is gone forever. In case of default, the loan balance remaining is taxed as ordinary income and a 10% early withdrawal penalty is added. 3. Even if the 401(k) plan allows continued contributions and loan payments, if someone needs to take a loan from their 401(k) in the first place, what are the chances they're in a position to continue making contributions? Not very good I bet. The pitfalls of taking out a 401(k) loan are significant enough, that despite the ease of doing so, for almost everyone it should be considered the absolute last resort for a source of financing. Just my $0.02. :) Joe,

That’s an excellent point about there being no absolutes with things related to finance. How true!

But as far as 401(k) loans go…

Without being able to see the T. Rowe Price study to verify their numbers, possibly they factored in one or more of the traps a 401(k) borrower could fall into?

1. Some plans forbid contributions to your 401(k) when a loan is outstanding. The negative impact on the future value of the 401(k) should be painfully obvious… you not only lose out on the interest, but you lose out on any company matching.

2. If you change jobs, the entire loan balance is immediately due. If you can’t pay it back right then, it’s considered a taxable withdrawal and future tax-deferred interest on that money is gone forever. In case of default, the loan balance remaining is taxed as ordinary income and a 10% early withdrawal penalty is added.

3. Even if the 401(k) plan allows continued contributions and loan payments, if someone needs to take a loan from their 401(k) in the first place, what are the chances they’re in a position to continue making contributions? Not very good I bet.

The pitfalls of taking out a 401(k) loan are significant enough, that despite the ease of doing so, for almost everyone it should be considered the absolute last resort for a source of financing.

Just my $0.02. :)

]]> By: JOE http://www.joetaxpayer.com/401k-loan/comment-page-1/#comment-208 JOE Mon, 12 May 2008 18:39:23 +0000 http://www.blog.joetaxpayer.com/?p=147#comment-208 Carrie, you may be right, but I believe every situation is different. Did one parent stay home to care for a newborn, and the loan will float them the time until both are working? Will the loan pay down high interest CC debt? Most important to me was the article's math was wrong, by a factor of 10X. Thanks for visiting. Joe Carrie, you may be right, but I believe every situation is different. Did one parent stay home to care for a newborn, and the loan will float them the time until both are working? Will the loan pay down high interest CC debt?
Most important to me was the article’s math was wrong, by a factor of 10X.
Thanks for visiting.
Joe

]]> By: Carrie http://www.joetaxpayer.com/401k-loan/comment-page-1/#comment-207 Carrie Mon, 12 May 2008 14:59:44 +0000 http://www.blog.joetaxpayer.com/?p=147#comment-207 I have been hearing people talk about using their 401(k) to get out of mortgage trouble. My advice is--- don't. Most often people in mortgage trouble fall back into trouble... you will need that money for later... get out of mortgage trouble another way, any way! Just save that nest egg for your later years or you will be out of luck later! I have been hearing people talk about using their 401(k) to get out of mortgage trouble. My advice is— don’t. Most often people in mortgage trouble fall back into trouble… you will need that money for later… get out of mortgage trouble another way, any way! Just save that nest egg for your later years or you will be out of luck later!

]]>