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Personal Finances / Credit Cards and Consumer Debt


Subject:  Re: IRA question Date:  2/11/1998  7:43 AM
Author:  Jackstone Number:  639 of 312148


Assuming you are referring to a 401(k) plan with matching contributions, you are able to borrow
from your account IF your employer's plan specifically permits it, with repayment going back to
your account. In effect, you borrow from yourself and pay yourself back.

The downside is that you lose the compounding that occurs over time on your account principal
during the period that it is missing from your account. For example, if your account has $30k, you
borrow $15 k to be repaid over 5 years, and during that period your 401(k) investments earned
15% annually, you would lose out on that tax-deferred compounding for the $15K that you
borrowed (which would have doubled during that period had it not been touched. Likewise, future
compounding would occur only on a lesser principal balance (since you missed out on the earlier
compounding), and so on.

In short, the magic of tax deferred compounding is the prime reason that most financial planners
recommend against borrowing from your 401(k) unless absolutely necessary.>>

Just a quick note. I took out a loan from my 401K to pay off some consumer debt loan. Although I agree that taking a loan out from your 401K reduces the return, I don't believe that it reduces it all that much. I pay 9% APR on my 401K and therefore my 401K has a guaranteed 9% return for the time that I have my loan. I know that it isn't the 15% or so the stock market may produce, but a riskless (since I am paying myself) 9% return in a retirement fund is still very good, if I put the money to wise use out in the non-retirement world... Anybody have any thoughts on this???
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