Car loan vs 401k loan?

[TomYoung]

I’m not a fan of Ramsey at all. That said, I think his advice is decent for people unfamiliar with financial planning.

Years ago, I took out a loan from my Traditional 401(k) (not a Roth) to buy a second property. Reviewing my paystubs, I noticed that my loan repayments were taxed as regular income. I’m unsure if this applies to all 401(k) loans, but I’d recommend checking with HR or your 401(k) administrator to confirm how loan repayments are taxed.

In my case, this means I’ll be taxed twice—once on the loan repayments (since they come from post-tax income) and again when I withdraw the money in retirement.

Since you mentioned skis, here is a fun pic from this week!

View attachment 269231

Great ski picture, but you have it wrong. You are continuing to put money into your 401 k that is tax deferred. But your loan repayments are separate. The money you are repaying has to be taxed as income. If you take out a bank loan, you would also pay it back with money that you have earned and payed tax on.

 

[neosomatic]

Great ski picture, but you have it wrong. You are continuing to put money into your 401 k that is tax deferred. But your loan repayments are separate. The money you are repaying has to be taxed as income. If you take out a bank loan, you would also pay it back with money that you have earned and payed tax on.

Sorry about the confusion - I meant to explain it as you are double taxed on the interest you pay on the loan.

 

[TomYoung]

Sorry about the confusion - I meant to explain it as you are double taxed on the interest you pay on the loan.

That is still wrong. The money going into your 401k for the repayment does not know whether it is interest or not. On the plus side, you are paying the interest to yourself, while you using the money you borrowed.

 

[neosomatic]

That is still wrong. The money going into your 401k for the repayment does not know whether it is interest or not. On the plus side, you are paying the interest to yourself, while you using the money you borrowed.

https://www.morningstar.com/retirement/401k-loans-mythbusters-edition The interest is 100% double taxed on a traditional 401k loan.

 

[Sumboodie]

Let's say I'd pull 20k for 4 years and my 401k is making 10%.

That's ~around 9200 interest earned.

A car loan usually isn't that high...

 

[Sumboodie]

I'd consider it maybe in an appreciating asset, or actual NEED.

Like let's say roof is leaking and needs replaced at $15k.

Not replacing means potentially tens of thousands in collateral damage. Rotten sheathing, rafters, ceiling damage, insulation, mold, etc.

 

[TomYoung]

https://www.morningstar.com/retirement/401k-loans-mythbusters-edition The interest is 100% double taxed on a traditional 401k loan.

They are making the point that you pay back the loan with after tax dollars. That actually applies to both the interest and the principal. The example is made of taking the loan and paying it back immediately with the money borrowed. But that is not correct or realistic. What is true is that everything you buy, groceries, clothes, hotel rooms is payed back with after tax money. There is no alternative to compare it to, no way to avoid the taxman.

 

[JHZR2]

The other thing is that my 401k is averaging ~16% over the last year. So I would be earning less interest on the loan amount, and less interested on the lower balance?

That isn’t necessarily going to last though.

How stable is your job? What are the fees?

My take is that you’re buying more car than you can afford, and the terms aren’t great.

The only financing I’d do is below market rate. These days it’s maybe 3% or less. IOW cash sitting in a savings account earns 4% so financing at 3 is ok-ish. Break even, and perhaps gets a better sales term.

Paying yourself back interest is a nice thought, but it’s still paying a decent amount of interest. That you are on the hook for, and if any job instability or inability to pay comes up, you have a big tax bill… so it really comes back to job stability and if the deal is good versus finding manufacturers loans.

Remember you’re doing this for a depreciating asset that could be in an accident and rendered useless (with subpar insurance payouts) tomorrow. You are always on the hook for the debt but do you want to be on the hook with your retirement money?

 

[pcoxe]

After i got my house paid off, I started making "payments" into a savings account anticipating a new vehicle. It requires one to be living frugally for quite a while but it gets the interest monkey off your back. Become your own banker!

 

[gfh77665]

Thats what I was saying on the previous page. He can actually make money if the market declines. I would say its a 50/50 chance at this point. After two big years of gains its due for a reset, IMO.

If I had needed to take off a 401K loan, I would LOVE to be paying it back right now!

Just like I said.