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Subject:  Re: Reinvesting 401k Loans Date:  7/30/2010  2:58 PM
Author:  CUInHawaii Number:  67386 of 88498

I think my point was lost in a couple of the responses. The idea is to reinvest the loan money, possibly in the same investments that it would have been in the 401k.

Also, the statement that 401k loans are "double taxed" is a myth:

It's not generally a good idea to borrow money from your 401k because:

1. If you lose your job you will be forced to repay immediately or pay heavy tax penalties
2. Your investment returns will suffer as you have less invested
3. The interest isn't tax deductible, many other loan types are.

This hypothetical scenario has some advantages by:

1) If the investments you make with the loan money are liquid, they can be sold to pay off the loan at any time (e.g. you change jobs) and avoid penalties.

2) If the investments you make with the loan money are the same or at least have the same performance as your 401k, your not hurting your long term results.

The problems with this scenario seem to be:

1) It may be hard to match your 401k returns while dealing with trading costs and long/short term capital gains which aren't a problem in the 401k. You will likely have to sell regularly to make the loan payments.
2) If you lose your job or change jobs and are must pay off the loan, the timing may not be right to liquidate the loan investments.
3) At the end of the loan term, you might have more money in this approach, but any gains made from the loan money beyond the interest rate will be outside the 401k.
4) The higher the loan interest rate, the more appealing this approach is. This would be far more appealing at %20 than %5, despite the absurdity.

I am in no way recommending anyone do this. I'm just fascinated by what-if's like this.

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