Posted on 07/17/2008 9:31:49 AM PDT by InvisibleChurch
Borrowing against a 401(k) may seem attractive, especially in today's economy. Yet most employees don't realize that borrowing just $30,000 from their 401(k) plans could cost them as much as $600,000 in retirement income. The National Center for Policy Analysis has developed a calculator that shows just how expensive 401(k) withdrawals can be.
The NCPA 401(k) calculator shows, for example, that withdrawing funds from your 401(k) now is typically not worth the tremendous amount of money you forego for your future retirement security. The calculator clearly demonstrates the impact of borrowing from a 401(k) plan, and can help determine how much a loan will cost in terms of lost savings and investment opportunities:
Imagine a 35-year-old worker who borrows $30,000 over a five-year period, with monthly payments of $583. Assuming no pretax contributions are made during the loan repayment period, if the account were earning a market interest rate of 6.25 percent, he would have $192,794 less at retirement (age 67) than if he had not borrowed. If his account were earning a market interest rate of 10 percent, he would have more than $646,200 less at retirement than if he had not borrowed. Even in extreme situations, it's best for people to seek other sources of capital before tapping into their 401(k) accounts, says Pam Villarreal, a senior policy analyst with the NCPA, who recommends that before employees touch their 401(k) plans, they access the NCPA's borrowing calculator in order to:
Make annual comparisons of projected 401(k) balances, with and without a loan, from the year the money is borrowed until the year of retirement. Compare monthly income at the time of retirement, with and without a loan, based on a 30-year fixed annuity. Source: "401(k) Borrowing Calculator," National Center for Policy Analysis, July 17, 2008.
For text:
http://www.ncpa.org/401kcalculator/d401kwa1.php
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/index.php?Article_Category=17
People will do what they have to do.
Borrowing money from a 401(k) account is dangerous for two reasons: one, you pay interest to yourself using after-tax money, which is taxed a second time when distributed, effectively exposing yourself to double taxation; and two, if you lose your job, the entire loan amount becomes due, and if you can’t pay it back in time, it’s treated as a distribution, with penalties and taxes due.
On the flip side, borrowing from your 401K requires paying back at a specified interest rate. Considering what the stock market has been doing lately, that might be a better option.
I looked at my 401k yesterday and wished I had borrowed all of it last year. I’d be money ahead.
It’s how my mother paid for her house. Now she owns it free and clear while others all around are losing theirs to foreclosure.
Can’t get much dumber than that.[/sarc]
As long as you repay the money before the market starts going back up you might come out ahead borrowing right now. Take a look at the direction of you 401(k) right now and it is probably shrinking, just like the market.
I’d even go for tucking it in the mattress as a better option.
Sort of depends what yo udo with the money, no? If the 401k loan is fixed at 5.5% and you use it to pay off debt at an interest rate higher than your assumed investment rate it’s kind of a no brainer. Unless you run the debt back up again!
This analysis assumes you suspend contributions during term of the loan. As long as you maintain your contribution level and pay the loan payments you lose nothing. As some people already pointed out you may get a better rate of return than the market. If the loan is in lieu of another loan from a bank then why not pay interest to yourself as long as you don’t suspend your investment contribution.
If you had bought Bank of America $22.50 call options yesterday you would have made 69X your investment!
That's right. Options selling for .06 cents yesterday were worth $3.95 today.
Yikes. One trade like that a year and one could retire easily.
It would be even better, if there were some way to know what they were going to trade for tomorrow...
Thing is...we're coming off a tremendously oversold bottom where oil had been driven too high and doom and gloom was thick.
When the turnaround happens in conditions like that, that's were some huge money is to be made.
69X profit in 9 hours! Wow. I wish I had had $1,000 in that option.
I borrowed money from my 401(k) account last year to help finance some start-up expenses for a small business. I specifically sold off a portion of my BOND portfolio — which wasn’t generating a great rate of return anyway — to do this.
Agreed... But, if you do then you should make the interest rate at least 10%.
I do know what these options are going to be trading at tomorrow.
Tomorrow is options expiration day so they will be $0. That's why the risk/reward was so great.
I might conceivably borrow from a retirement fund to buy something I was confident would increase in value.
Houses do not fall into that category.
I reduced my contribution from 25% of gross pay to 10%, until the market steadies itself. I’ve lost a lot.
Who said she wanted to sell the house? Not everyone sees a house as little more than an investment. Some see them as homes to live out their remaining years.
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