Is it better to increase the set loan payment amount for a 401K loan to pay it off faster or to increase the investment percentage before taxes getting the rate up to 10%? You do pay an interest rate on the loan but it is being paid to yourself.Thanks.
IMHO, you need to forget that you are the debtor on the loan for a moment. Instead, focus on the total contents of your 401(k) which includes a number of invested assets including, for example, a number a mutual funds & a prommisory note (for which you are co-incidentally the debtor). Which of your assets in the account are performing the best? If your mutual funds are returning 20% & the note is returning 10%, the prudent investor would therefore like to dump the note & buy more of the funds. On the other hand, if the funds are returning 8% & the note is returning 12%, then one would want to hold more notes & dump the funds. In short, decide as a disinterested investor whether or not continuing to hold the prommisory note is a good investment decesion.
Greetings, Pharp, and welcome. You asked:<<Is it better to increase the set loan payment amount for a 401K loan to pay it off faster or to increase the investment percentage before taxes getting the rate up to 10%? You do pay an interest rate on the loan but it is being paid to yourself.>>Keep in mind that the loan is being repaid in after-tax dollars. Thus, the interest you pay yourself is also after-tax dollars; however, it is considered earnings within the 401k. Thus, when you finally retire, all of that interest is taxed again. For that reason, increase the loan repayment if you can.Regards....Pixy
hi pharp. your question made me stop and think for a minute but i would suggest that both actions are good ones. of course you want to repay the loan asapsince most plan documents don't allow multiple loans-so if you ever need another loan it probably wouldn't happen unless you repaid the first (check your plan doc) on the other hand, you should increase the percentage being contributed into your planespecially if your employer is making a matching or profit contribution. The two are usually limited to a certain percentage of what you defer (again check your plan document for those specifics or ask your HR person)
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