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Subject:  Re: Borrow from 401K for Roth Date:  11/17/1998  8:57 AM
Author:  TMFPixy Number:  6638 of 88810

<<Here is something I'm currently considering. Any comments or suggestions??

I'm currently maxing out my 401K and am on a pace to do so again this year. I'm trying to save to invest in a Roth IRA as well. The 401K and paying down debt has kept me from setting aside $4000. The debt is now
gone!! :) I can probably get to $2000 by Dec 31st. What I'm thinking over is borrowing an additional $2000 from my 401K to put in the Roth to get to the maximum $4000. I think that after matching amounts in a 401K, the Roth is a better long term investment than unmatched 401K contributions since the Roth is tax free while the 401K is tax deferred. I also always hear to never borrow from the 401K. I fully agree to pay for other spending but this is for further investment.

Here is all I can think of right now:

Maximum amount invested in a Roth.
More control of the funds. (401K limited to 8 mutual funds and company stock. Most in a 500 index fund.)
Tax free growth

Lower cash flow next year as the loan is paid off
Opportunity cost of 401K growth. (Should be cancelled by Roth growth)
401K loan is repaid with interest (9.25%)
Loan is due immediately if I quit my company. (Don't plan to)

Are there other pros and cons that I haven't considered yet? It seems almost like investing on margin.>>

Add to the cons the fact that your repayment comes from after-tax money, so every dollar you repay actually costs you $1.15 to $1.28 depending on your tax bracket. Also, the interest you pay yourself on that loan with those after-tax dollars will be considered earnings within the account, which means they will be taxed again when the money is withdrawn at retirement.

Loans from 401k plans rarely make sense. Think long and hard before you do this. If you're dissatisfied with your options, put in enough to get the maximum possible match from your employer. Then put the next $2K in a better performing investment within a Roth IRA. After that, decide between the 401k and a taxable investment using an analysis like that found in Step 4 of my 13 Steps to Foolish Retirement Planning found at .


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