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|Subject: Re: 401(k) loan||Date: 3/28/2013 6:00 PM|
|Author: JAFO31||Number: 71545 of 76882|
culcha: "I know it's a bad thing, but, last year, in order to avoid other bad things that were even worse, I took out a 401(k) loan. It was for the max: $50,000. Now, I'm paying that back at $900+ a month. The payments are scheduled over a five-year period, by which time Ill be a few months away from my planned retirement."
Ok. I am not as reflexively against 401k loans as many on these boards, but much depends upon the loan terms of your plan.
"The thing is, I have to make the payments with after-tax money. But when I do retire (which will be either according to my plan, or perhaps a couple of years later), I'll be taking money out of the 401(k) and having to pay tax on it. The closer I get to retirement (and the end of paying off this loan), the worse it seems to me tax-wise.
In the worst case, if I retire as planned, I'd be making the last few payments on the loan -- with money that I've already been taxed on --and soon afterwards retiring and taking money out of the 401(k) and having to pay tax on it again.
Somehow that doesn't seem right. Maybe I am missing something, or not thinking about it in the right way? (Or maybe this is just one of the things that make a 401k loan a bad thing?)"
You are tying yourself in knots for no good reason.
1. You always knew that money coming out of the plan would be taxed.
2. There are very few personal loans that still generate tax deductible interest - home purchase money, home equity not to exceed $100k, student loan (subject to income limitations) and margin loans (to the extent of investment income, as I understand it). Either theese choices were not available to you or you determined that they were worse for you than the 401k loan.
3. If you had borrowed from any other source with a loan whoe interest payments were not tax deductible, you would be paying with after tax income, and you would still be paying tax on all money coming out of the 401k. IOW, no worse off than you are now.
4. The only real alternative is to either pay the loan early - either off altogether or with proceeds of a different loan that would allow you to deduct interest payments. If no such loan exists, then we are back to number 2.
Just my $0.02.
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