Should I borrow from my 401K?

Question

I believe the market is due for at least a 10% correction. I can borrow from my 401K to pay off a car note I'm paying 7% interest on. By borrowing I shield my money from any market correction along with avoiding a "hit" if the market does what most people expect it to do. I expect to have the money repaid in 2 years. Why is this frowned upon by financial advisors giving todays market condition (all time high with negative indicators)

Answer 1

You could, but I wouldn't. If you want to get rid of that 7% loan, why not look into getting a credit card with a 0% Balance Transfer off? Use that money to pay off your card, then pay off the credit card at 0% interest. just because you think a market correction is coming is no reason to pull your money out of your 401k, if your that worried about it (and near retirement) look into putting your money into a safer investment, if your young, just let it ride itself out for several years.

if you own your home, take out a equity line of credit and the interest can be tax deducted.

Answer 2

Borrowing against your 401k does make sense (so would maybe a home equity loan if you are a homeowner). In terms of borrowing vs. just withdrawing, I suggest calculating the cost in interest of paying back the 401k loan (being realistic about how long that will take) vs. the taxes, penalties, and forgone returns from withdrawing outright. Odds are, either one of these options will save you money over the interest on your credit card debt, which have the highest interest rates of most anything.

Answer 3

I participated in my company 401 for many years and always tried to avoid borrowing from it. Obviously, you want your money in the investment whenever the "Big Up" days occur. No one knows when those days will happen but history indicates there are only a few each year. There's also the chance that you may have good intentions to put the money back (before the penalty kicks in) but many times due to unexpected happenings the money never finds its way back. In addition, I have seen studies that show once borrowed there could be a trend established to borrow again. The big key for the average guy is investment "Time". You need that dollar to stay invested for 30-45 yrs. Take it out "once and a while" and you suffer in the end.

Answer 4

I would not borrow against your 401k unless it was an emergency. If you are making ends meet with the car payment I would leave it be. Actually 7% interest is not a bad interest rate at all. If you are not meeting your expenses, maybe try to refinance the car or take on a second part time job to pay extra on the principal of the car note to pay it off quicker.

Answer 5

Taking a loan out against an appreciating asset to pay the debt down on a depreciating asset doesn't sound like a good idea. Plus, don't forget that you will have to pay back that loan with post-tax income so it will take you a lot longer to pay back. There are some very rare circumstances where it might be ok to take a loan out against your 401K (family death, extreme illness) but this doesn't sounds like one of them. 401K investments should also be earning more than 7% if you are lucky.
God Luck!

Answer 6

If you're not at least 59.5 years of age you will be penalized 10% for early withdrawal. So you will be paying 3% more over your 7% - not including the interest gain (at least 3-10%) you will be loosing on the amount you withdrawl. So figure you will loose at least 6% to 13% more on any money you take out.

Other than that, go ahead.

Answer 7

I would not recommend borrowing from your 401K. If you leave your company the outstanding loan will be treated as an early withdrawal and you will be taxed heavily for it.

Answer 8

Don't do it unless it's a really big emergency and then pay it back as quick as you can. My mother borrowed against hers to try to pay off some bills and now she has more bills and can't borrow against it.

Answer 9

It is not a wise idea.