They give you a big break, I forgot what, when you use it for your primary home purchase.
I wanna pay down a HELOC with a 401K loan.
- Thread starter daves66nova
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I don't plan on leaving, since I only have 9 years to retire. You can refi just a HELOC alone? I hope not 1st loan, since I have 2.3%
Complex question requiring a tax accountant.
If you take a 401K loan you have to pay it back with after tax dollars, which will get taxed again when you take out your 401K.
Interest rates are falling. The 10 year is below 4% and I would expect to see the 30 year fixed back at 6.5% soon if it isn't already there. I would look into refinance options if there are any.
If you take a 401K loan you have to pay it back with after tax dollars, which will get taxed again when you take out your 401K.
Interest rates are falling. The 10 year is below 4% and I would expect to see the 30 year fixed back at 6.5% soon if it isn't already there. I would look into refinance options if there are any.
It may not be up to you if you are laid off. When I said refi, I was thinking the primary mortgage and not just the HELOC alone, but since you have 2.3% on the primary then it makes no sense.
In your case, if I were you I would roll over the 401k to IRA then borrow from your account. 8.5% no risk saving from HELOC is a good deal vs a "maybe 10% average return with market risk". That's just me. You do what you are comfortable with.
So if I am reading this correctly you have 2 rentals that are cash flow positive (after all costs?) and you have this loan on your primary residence that you used to acquire one of them?
If that is the case, its not really a loan. Its leverage on a productive asset. I would just throw whatever extra money at it you can and be happy. Debt on productive asset is different than debt on something sitting in your closet.
If that is the case, its not really a loan. Its leverage on a productive asset. I would just throw whatever extra money at it you can and be happy. Debt on productive asset is different than debt on something sitting in your closet.
I don't follow. Whether OP is paying back a 401k loan or paying off the HELOC both are after tax dollars.
If he takes $46K out of his 401K, he then will need to replace it with after tax dollars - the dollars in there now were before tax.
Then when he takes the money out at some future time, he will pay tax on it again.
He will also pay himself interest with after tax dollars. Once there in the 401K, he will be taxed on them again when he takes it out. The supposedly lower rate on the interest today may not be so much lower years from now after you factor all this in. Depends on individual tax rates, loan rates, etc. Its a question for a tax accountant.
Your also adding to the mix there will be no appreciation on that 401K money while its out of the account. You don't earn advancement on your borrowed money. When he borrows 46K his balance goes down $46K. So he will loose 100% of the appreciation or interest or whatever from that portion of his 401K while its gone. That could definitely be more than the interest he "saves" by itself.
My generic way of thinking is he needs to leverage the rental property instead of his personal residence. Then he can deduct the interest on his taxes to offset the rental income. Generically speaking of course, I am not a tax accountant and don't know the OP's particulars.
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He is proposing a LOAN. Not a withdrawal. This discussion is tangential and doesn’t answer the question.
Yes, I understand it is a LOAN. No need to yell.
In this case, he is taking out a $46K LOAN (balance removed from 401K aka taken out) at around 10% rather than paying a HELOC at 8.5%, but since he is paying the interest to himself its "OK" because your paying yourself, not the bank.
Except when you withdraw that money at retirement he isn't getting 10% of whatever back, its maybe 6.5% due to it being taxed again.
When you take a loan from your 401K, your broker no longer pays an increase on that balance because its no longer in the account. So you loose whatever that is during the time its gone. If he was making 5% on that money in a money market in his 401K, he is giving up that 5% (compounded tax free) while the money is removed, until its put back. Thats another 5+% loss.
So now your paying yourself 10% instead of the bank 8.5% but loosing 3.5% in future taxes and then another 5% in lost balance interest Maybe still better, but not simple to calculate. Its not linear math.
My long winded point - he isn't really paying himself 10% instead of the bank 8.5%. Its not that simple.
He might be better to leverage the rental, pay off the HELOC on his own home, and write off the interest on taxes. Good question for a tax accountant.
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A 9% loan is expensive. There are much cheaper loans, and in fact, your HELOC is cheaper (and likely deductible).
Keep the HELOC. Direct your cash flow towards that while continuing to contribute to your 401(k).
Vanguard is a fine choice for fiduciary, by the way.
Please allow me to add that a 401(k) loan is a tool.
But like all powerful tools, it has the potential for benefit, as well as the potential for damage, depending on how it is used.
I had to come up, unexpectedly, with $35,000 for fall semester tuition about 13 years ago.
Bit of a story in how that came to be, and I did not have that much in cash at the time, so I borrowed it from my 401(k) and paid it off in a year. The school was willing to loan me the $$, but the interest rate on my loan was lower. Schwab was very helpful and I had the money in about 3 days. I had that much in the “sweep” account in my 401(k), by the way, so, I didn’t miss out on any investment return.
It was the right tool for me at the time. It is not the right tool for every circumstance.
But like all powerful tools, it has the potential for benefit, as well as the potential for damage, depending on how it is used.
I had to come up, unexpectedly, with $35,000 for fall semester tuition about 13 years ago.
Bit of a story in how that came to be, and I did not have that much in cash at the time, so I borrowed it from my 401(k) and paid it off in a year. The school was willing to loan me the $$, but the interest rate on my loan was lower. Schwab was very helpful and I had the money in about 3 days. I had that much in the “sweep” account in my 401(k), by the way, so, I didn’t miss out on any investment return.
It was the right tool for me at the time. It is not the right tool for every circumstance.
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i did mention that the 9% interest goes back into MY account? So i'm only charging myself
I get that I am tired and no disrespect brain not working right now but isn’t that kind of unproductive?
Back in the late 80's we were young, naive kids who bought our home at 10.5% interest. We had good credit but thats what mortgage financing was back then. Lots of young people have NO IDEA about the 80's in general. So, after 1.5 years of payments, we took a 401K loan out and paid it off. We were in our late 20's and owned two cars and a very decent 3-2-2 brick home debt free. THEN, we buckled down and quickly refilled our 401K over the next 5 years. More than made up for it. Some will disagree but that was one of the best decisions we made. It gave us freedom few of our peers couldn't even dream about.
Opportunity, market gains on borrowed money from 401k don’t happen during the payback period.
Is $46k under 10% of your value of 401k or more? If yes I’d consider this.
Yes it could tank and so will the 401k.
It's your money use it like you want to. You may never make it to retirement too.......
A lot further back when only pre-tax was options for 401k not Roth, my dad was able to max out his 401k contributions by like October almost yearly. He had his main job income, side business income and Army Reserve income.
He would take a loan from his 401k every year for 2-3 month payback at the same contribution rate he was doing. He took that loan money and put it into an IRA. It was easier for him at the time to get the one check to use and keep contributing to 401k like normal vs. arguing with mom about XX thousand from checking account. It worked for him and mom.
He passed at 80, mom is 87. Between SS, pensions and the investments mom is comfortable, not wealthy, debt free and helps her sister also.
Every ones situations are different. I did a loan from 401k for my used Accord. Interest was much less than dealers and banks were at the time. Whatever happens in future due to that I need to deal with then. I've missed many opportunities from stocks and others but my crystal ball was cloudy. I still am concerned always BUT I know I am better prepared than many.
He would take a loan from his 401k every year for 2-3 month payback at the same contribution rate he was doing. He took that loan money and put it into an IRA. It was easier for him at the time to get the one check to use and keep contributing to 401k like normal vs. arguing with mom about XX thousand from checking account. It worked for him and mom.
He passed at 80, mom is 87. Between SS, pensions and the investments mom is comfortable, not wealthy, debt free and helps her sister also.
Every ones situations are different. I did a loan from 401k for my used Accord. Interest was much less than dealers and banks were at the time. Whatever happens in future due to that I need to deal with then. I've missed many opportunities from stocks and others but my crystal ball was cloudy. I still am concerned always BUT I know I am better prepared than many.
Just remembered a detail about my 401k, may not apply to here:
On my 401k, one of the rules is that I had only two options: make the schedule payment, or pay off in full. There was no way to pay extra to the principle. I didn’t like that but the one time I used a 401k loan it wasn’t a problem (house buying/selling). Not sure if the OP would have the same limitation.
On my 401k, one of the rules is that I had only two options: make the schedule payment, or pay off in full. There was no way to pay extra to the principle. I didn’t like that but the one time I used a 401k loan it wasn’t a problem (house buying/selling). Not sure if the OP would have the same limitation.
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