SHORT TERM BORROW AGAINST 401K TO HELP GET OUT OF A HOLE?
Currently my boyfriend is laid off, I am working full time, but we are struggling a lot with a new baby and everything else. Since my car is only a 2 door, I have been driving my parents 2nd car because it is 4 doors. My parents said that if I could sell my car, I could drive theirs still for a while, with no car payment til we get things straightened out financially. However, I am going to get probably about $2000 less than what I owe on the car. I have someone that offered to buy it, but I need to come up with the $2000 to pay the difference. I know it is not the best thing, but if I borrowed against my 401k, paid that off, got rid of the car, and had the payments to my loan taken out of my paycheck directly I will not get hit with any tax penalties. I actually will probably pay it in full after the first of the year comes and I get my income tax return. So really I'd only be borrowing from my 401k for a few months. My boyfriend and I are arguing about whether this is a ridiculously stupid idea, or if it will help. (I think it will help, he thinks its stupid). ANY advice would be SO welcomed because I want to make a good decision and wasn't quite sure where to turn. Thank you!
- Anonymous1 decade agoFavorite Answer
Borrowing from a 401K can be a the best option. I hate doing it. If you are laid off often the loan comes due 100%.
- 1 decade ago
Probably a sure fire way to ruin your future.
You are slowing down the growth of your retirement fund. The money you withdraw stops growing until you pay it back. Some plans don't allow you to make more contributions if you have an outstanding loan, which hurts your retirement savings even more.
You repay the loan through payroll deduction, so the loan will cut down your take-home pay.
If you leave your job either voluntarily or involuntarily, you have to repay the entire outstanding balance in 60 days or face a huge tax bill. This can be very difficult to do when you are leaving your job, particularly if you are laid off. If you don't pay it back, the remaining balance is hit with a 10% early withdrawal penalty and you have to pay federal and state income taxes on it that year. So if you had borrowed $50,000 and couldn't pay it back, you would have to pay a $5,000 penalty and federal and state taxes that could take another $20,000 of the amount.
- Anonymous1 decade ago
It is only ridiculously stupid if you cannot qualify for a low cost loan from a credit union for the $2000 or you cannot save up the $2000 first before you sell the car.
If you stop contributing to your 401k plan and use the money to pay off the loan (or better yet cut spending and pay it off faster) you will generally come out ahead in the long run.
In the long run it is financially unwise (notice my word choice) to use 401k money for anything other than retirement. I know that "everyone" borrows from their 401k...but they really don't. Look very carefully at the people who do -- would you want them managing your budget? Not usually.
There are at least two "dirty little secrets" about borrowing from your 401k:
(1) It means you are not saving enough. 401k savings is not "savings" it is "retirement savings." You should be putting money aside (first) every month for emergencies and rainy days. At a minimum, everyone should be saving 5% for a Rainy Day fund (put it in a savings or money market account) and then 7% for retirement (401k and/or IRA).
(2) The cost of 401k loans are a good bit higher than it looks on paper. In the first place you are paying pretax money back with after tax money. Then, when you retire you are going to pay taxes on that money again when you take it out of your 401k plan. Third, for every month that you borrow out of your 401k, you will have to work (on average) two more months to put it back (one to pay it back and another to catch up). That means that if $2000 represents one years 401k contributions ($167 per month) then you will retire two years later than you otherwise would. The only way to "fix" that problem is to increase your 401k contributions after you pay off the loan (which most people do not do).
- Anonymous1 decade ago
Is your boyfriend eligible for unemployment benefits? If so, that may be a big help.
Be careful borrowing from a 401k. As already stated, there are stiff penalties for not paying back on time. It can work, but you have to be disciplined
You may want to consider reorganizing your life if you are getting into financial difficulties. Maybe buy a cheap car with low to middle range mileage that doesn't look flashy but gets the job done. Have you tried cutting up credit cards and going on a cash only budget? That makes you think about your spending.
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- Howard LLv 71 decade ago
Borrowing from your 401K is almost always the best option because the interest actually goes back into your 401K so it is an interest free loan. I say almost always because it's not a good idea if you can't pay it back.
However, many 401K plans do not allow you to borrow except for certain specified purposes. You need to check with your plan administrator and find out if they would let you borrow for this purpose. Also, many 401K plans do not allow you to have more than one loan at a time. If your boyfriend remains out of work will you need more?
- haperLv 44 years ago
Please seem elsewhere for the money. i do no longer have self assurance there's a stipulation on borrowing (back) besides the undeniable fact that that's a foul monetary pass. Joe Schmuch you artwork with will say what a great deal that's "pay your self the pastime". do no longer purchase it. you're dropping the ''compounding pastime'' by technique of taking from the completed stability and decreasing it. in case you go away your interest and performance to rollover the 401k you may have ninety days (i imagine) to pay it back or you should declare it as income and pay an more suitable 10% penalty. 25% to 40 8% capacity loss, no longer me. good success.
- Anonymous1 decade ago
being that your BF is not working and YOU have the access to the car and teh money - he shouldn't be whining - int rate will be under 10% for a 401k loan, so for a short term solution - I don;t see any major problems - you will need at least a $4000 vested balance in order to borrow $2000 - they usually limit loans to 50% of your vested balance
- JudyLv 71 decade ago
Sounds like a reasonable plan as long as you are surely going to pay it back on schedule. If you don't, it turns into an early withdrawal and is taxed at your regular rate plus a penalty of 10% of the amount not paid back.