Fixing Your 401(k) – Part 4

Problem #3 – Loans

“Brother, Can You Spare A Dime?” (Bing Crosby 1932)
http://www.youtube.com/watch?v=eih67rlGNhU

There has been a popular myth lately that it is OK to borrow against your 401(k) plan. The most common thing I hear from those I talk with is “I’m paying myself interest!”

If you believe that, I’ve got some GM stock for you that you should buy!

All kidding aside, this could be the worst idea ever with regards to retirement savings plans. Dave Ramsey, nationally syndicated financial expert, has some thoughts on this as well.
“Never, ever borrow on your retirement.” Dave says in response to this question. http://www.daveramsey.com/etc/askdave/index.cfm?event=dspAskDave&intContentItemId=7802

Yet, almost 1 in 5 401(k) plans (18%) have a loan against it. This is according to Transamaerica for Retirement Studies in their annual survey. www.transamerica.org
http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3838

Reality is NOT “paying yourself interest”, but rather paying credit card interest to borrow your own money. OUCH!

What are the Tax Consequences on a 401(k) Loan?

When you borrow, you have 2 options –
1. Pay it back.
2. Don’t pay it back.

Of these, the best of course is to pay it back. However, did you know that when you do, you face DOUBLE TAXATION? You are paying interest with after-tax dollars that will be taxed AGAIN at withdrawal.

What about not paying it back? Well, obviously your investment takes a hit & you could be taxed up to 35%, and face the early withdrawal penalty of 10% if you are younger than 59 1/2. If you leave the company, the loan is automatically listed as a withdrawal, so it is “repaid”.
Again, you are paying interest, not to yourself, but to a lender on your own money.

What does this mean to your investment? It lowers the balance, certainly. How much depends on how many times the loan is taken, what amount, investments, payback and several other factors.

Please don’t “Spare a Dime” from your 401(k). You will need this money later!!
For more information, please contact me, Dean Voelker, at www.helpmy401k.us

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8 Responses to Fixing Your 401(k) – Part 4

  1. If you are doing research, use the internet to find a debt consolidation company. This is also a place where you can easily compare deals. It can save your time and effort.

    • deanvoelker says:

      Thanks for posting this. Although, as a Dave Ramsey disciple, I will advocate his use of the “Debt Snowball” method instead of Debt consolidation. With the Debt Snowball, you list your various creditors in order of smallest to largest balance. Then, pay these off in full as quickly as possible, also in the same order. For example if I owe $100 to Sears, $500 to Visa, $2000 on my car loan, and $4000 on Discover, I would make the min payments to all but Sears. Once Sears is paid off, I now take the money I was paying Sears and apply it to Visa. Oonce it is paid in full, I begin to work on my car loan.

      This method gives you “little victories” along the way, and actually allows you to see yourself digging your way out of debt. The problem with debt consoldiation is that it lowers the payment, which makes it take longer. Most people don’t focus on getting themselves “out”. Also in many cases, they borrow extra cash to have “in case of emergency”.

      Try the debt snowball idea before consolidating debt with a HEL (L) loan.
      http://www.helpmy401k.us

  2. Femestala says:

    Your blog is so interesting! I have subscribed on rss and I will read it regullary/

  3. Привет!! – Вы не правы. Предлагаю это обсудить. Пишите мне в PM.
    а если помешать со словами японские запчасти? 😉

  4. lootindisee says:

    Very interesting blog! Subscribed on rss. Regular will read it

  5. Good stuff Dean! I found it fascinating that 18% of people have borrowed from their 401K.

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