Yeah that's what I assumed.. NO THANKS.. Just save up the cash and buy a car IMO.
Car loan vs 401k loan?
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401K loans are intended as a last resort.
You lose the appreciation from money you pull from your 401K. You are repaying yourself with your own money. You are not making any interest on the loan because it is already YOUR money you are using to repay it. If I "borrow" $10 from my piggy bank and pay back $15 into my piggy bank next week, I did not make $5 in interest. It just cost me an extra $5 of available cash out of my pocket that went in my piggy bank. Nothing was earned.
You are repaying with after-tax dollars. Therefore, the interest you are repaying yourself is taxed a second time when you take a distribution later in retirement.
As mentioned earlier in this thread, if you lose or change jobs, the load must be repaid in full or else penalties and taxes are owed.
You lose the appreciation from money you pull from your 401K. You are repaying yourself with your own money. You are not making any interest on the loan because it is already YOUR money you are using to repay it. If I "borrow" $10 from my piggy bank and pay back $15 into my piggy bank next week, I did not make $5 in interest. It just cost me an extra $5 of available cash out of my pocket that went in my piggy bank. Nothing was earned.
You are repaying with after-tax dollars. Therefore, the interest you are repaying yourself is taxed a second time when you take a distribution later in retirement.
As mentioned earlier in this thread, if you lose or change jobs, the load must be repaid in full or else penalties and taxes are owed.
Is it better to pay it to some loan company and you never see any bit of it again?
Taxed or not, IF I was going to get a loan regardless, I would much rather pay myself back instead to some other bank.
Pretty simple.
I happen to agree, thats what I do, but thats not the question the OP asked.
Total cost to you is what matters, not who got the interest payment. This is not a simple idea of "paying interest to yourself or a bank". Taxes (fed and state) and account growth are at play too.
But it's fine, you do you.
What? I would much rather have the interest payment coming back to me, (even if taxed) instead of going to some bank.
Who wouldn't?
That’s like saying I don’t want a pay raise because I have to pay taxes on it. Makes no sense.
Leave your 401k alone until you retire.
Why is who gets the interest payment such an important point to you? Is that not counter-balanced by the lost growth, which should be substantially higher? Shouldn't the total cost, in the end, be the real driver? The OP's 401K repayment of 8.5% rate is pretty high, mine is 5'ish. That makes larger difference.
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Look at your assumptions here. You are assuming a 10% return for the next 5 years. You cant! Market will likely dip, correct or even have a bear market in the next 5 years. Its probabaly overdue now. Even if it doesn't, lower returns are likely due to historically high multiples. Here is what well respected Goldman Sachs says: We estimate the S&P 500 will deliver an annualized nominal total return of 3% during the next 10 years (7th percentile since 1930) and roughly 1% on a real basis.
https://www.gspublishing.com/conten.../18/29e68989-0d2c-4960-bd4b-010a101f711e.html
Don't make overly optimistic asumptions. It could be a perfect environment for the OP to self finance.
All of this has assumptions.
My current 10 year performance, including an account with a substantial cash reserve, is at a 9.2% for 10 years. 5 year is at 9.5%. I just WAG'd it at 10% because I don't hold cash in my 401K. Yea yea, past performance does not predict future returns.
This is also an assumption you won't get laid off, forcing a payback by tax time. Making you part with cash in a time when you probably really don't want to part with it. If you don't, you'll pay taxes and a 10% penalty.
A loan on a depreciating item is already a risk unto itself then add to it the loss of compounding growth and potential penalties if you leave your current employer. Take the car note is my advice.
401k is fine as long as you pay it back or capable of paying it back should you lose your job OR decide to go work for another company.
I know myself and I or my wife would never touch our 401k for a loan. Not saying anything is wrong with it. It's just us and our desire to not co-mingle our future with the present.
Also some assume all they are getting is a low interest return in their 401k well, that depends on how your invested. Being invested in the S&P 500 and Nasdaq funds the last 5 years blows away the low return of bank interest by a huge margin. The dumbest thing in here is listening about stock market timing, I wont go there because that turns the 401k into a gambling fund.
Anyway, I like that word now that I typed it. I dont think it's smart to "co-mingle" retirement funds with present day living. I do know, way too much of the population would be buying stuff more expensive than they should instead of something they can afford, like a car with a 3 or 4 year auto loan and not any longer.
I know myself and I or my wife would never touch our 401k for a loan. Not saying anything is wrong with it. It's just us and our desire to not co-mingle our future with the present.
Also some assume all they are getting is a low interest return in their 401k well, that depends on how your invested. Being invested in the S&P 500 and Nasdaq funds the last 5 years blows away the low return of bank interest by a huge margin. The dumbest thing in here is listening about stock market timing, I wont go there because that turns the 401k into a gambling fund.
Anyway, I like that word now that I typed it. I dont think it's smart to "co-mingle" retirement funds with present day living. I do know, way too much of the population would be buying stuff more expensive than they should instead of something they can afford, like a car with a 3 or 4 year auto loan and not any longer.
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Agree, I am in executive level meetings at a good sized company. Some crazy ideas being floated around because of all of the uncertanty in the economy right now. I will say tho that we always have a need for good technical people. If you have a good attitude and stay on the good side of your local management you should be fine, but a LOT of compaanies are looking to trim the bottom 20% of performers.
Its only for the OP to determin his job security. Only he can know that, we can't.
I am glad you see past performance does not predict future returns. I read a lot of market commentary from a number of the most well respected sources. Given the current crazy high valuations, its almost fanciful to dream of 10% returns for the next 5 years.
I am glad you see past performance does not predict future returns. I read a lot of market commentary from a number of the most well respected sources. Given the current crazy high valuations, its almost fanciful to dream of 10% returns for the next 5 years.
A loan is a loan at the same interest rate. The problem is people have no discipline in reducing debt and increasing investment. People who do one tends to do the other, and people who doesn't do one tend to also not do the other. I see this as no different than not contributing to 401K and save the money to buy a car with cash. As to "you need to repay your loan back if you get laid off", you can roll over to IRA before you borrow.
Thing is, I think many people can buy a more affordable vehicle but they don't, and they just want to enjoy now and pay more.
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The problem with a 401k loan is you will be double taxed. Once when you pay the loan back and once when you withdraw the money. Never take a 401k loan!
https://www.ramseysolutions.com/retirement/401k-loan#:~:text=You end up paying taxes on your loan repayments—twice.&text=Your 401(k) loan repayments,in has already been taxed).
I am not surprised that Dave Ramsey says this. I do like his advice on sensible living, and not overspending, but he is way over his skis on this one. Any money borrowed from anywhere to buy a consumer good is paid back with after tax dollars. There is no way around that. The money that goes into your 401K is placed there with the knowledge that it will be taxed eventually. But an amount goes away and hopefully increases with its investments. Many plans allow you to borrow from the plan, and as you do so, pay back what you have borrowed, plus interest. Ramsey's idea that you are paying taxes twice is just nuts, and wrong, showing confused thinking.
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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!
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