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Author: joeschmoe Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308340  
Subject: IRA question Date: 2/10/1998 5:49 PM
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I'm about to (finally) start a full-time permanent position. I will, of course, be contributing to my IRA, and my employer matches up to 10% of my salary.

I have heard that one can borrow from an IRA and I am wondering what the mechanics of this are. I am hoping to borrow from the IRA to pay off credit cards. Specifically, I had heard that when you borrow from an IRA, the interest that you pay is paid into the IRA, so really it works as if you were saving more money than you might otherwise.

Is this correct? It seems too good to be true.. If so, what would be the reasoning for borrowing money any other way?
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Author: jpg1 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 631 of 308340
Subject: Re: IRA question Date: 2/10/1998 6:14 PM
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< < I have heard that one can borrow from an IRA and I am wondering what the mechanics of this are. I am hoping to borrow from the IRA to pay off credit cards. Specifically, I had heard that when you borrow from an IRA, the interest that you pay is paid into the IRA, so really it works as if you were saving more money than you might otherwise.

Is this correct? It seems too good to be true.. If so, what would be the reasoning for borrowing money any other way? > >

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.

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Author: TchrP Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 632 of 308340
Subject: Re: IRA question Date: 2/10/1998 6:55 PM
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Another argument against borrowing from a 401K plan is that if you leave the sponsoring employer, you will probably have to pay the entire balance back immediately - and it may be at a time when you have no other loan options.

I'm considering something similar nonetheless, but from a 403(b) plan (a tax-deferred annuity). In this case, it's a TIAA fixed-income account where tax-deferred compounding isn't much of a concern, because the account basically doesn't earn capital gains and its total return is about the same as the interest rate. Also, the account is fully vested to me, not to my former employers, so having to repay the loan prematurely doesn't pertain.

I returned to school full-time this year, and I think that this is a better arrangement than a conventional student loan.

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Author: BeavisNButthead One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 633 of 308340
Subject: Re: IRA question Date: 2/10/1998 7:22 PM
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<< I'm considering something similar nonetheless, but from a 403(b) plan (a tax-deferred annuity). In this
case, it's a TIAA fixed-income account where tax-deferred compounding isn't much of a concern,
because the account basically doesn't earn capital gains and its total return is about the same as the
interest rate. Also, the account is fully vested to me, not to my former employers, so having to repay
the loan prematurely doesn't pertain.>>

The beuaty of student loans are there are so many ways to get out of paying them off or to have them interest-free. I still have 2 student loans that are almost 8 years old that aren't paid off yet. I could easily have paid them off many times, but I don't because there are many ways to defer the loan payments with no interest. Going back to school is one of those ways - if you are a half-time student you can stop payins on your student loans. Here's the real beautiful part - Uncle Sam pays the interest on these loans for you without you even knowing about it. This is a great racket.

It also sounds like you are a teacher. This brings up 2 interesting points. First off, why are you in TIAA when you could just as easily be in CREF? You still don't get to pick individual stocks, but at least you can put all the savings into an index fund and earn the market rate of return. Secondly, there are teacher cancellations of student loans, where you can cancel (never have to pay) parts of your student loan back simply because you are a teacher. Military service, Peace Corps, and other ways are great ways to get basically free money. Much better than borrowing against 401-k or 403-b.

Or something like that, huh huh huh.

BeavisNButthead

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Author: Jackstone Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 639 of 308340
Subject: Re: IRA question Date: 2/11/1998 7:43 AM
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<<

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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Author: RecoveringFool Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 640 of 308340
Subject: Re: IRA question Date: 2/11/1998 10:30 AM
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<<The beuaty of student loans are there are so many ways to get out of paying them off or to have
them interest-free. I still have 2 student loans that are almost 8 years old that aren't paid off yet. I
could easily have paid them off many times, but I don't because there are many ways to defer the
loan payments with no interest. Going back to school is one of those ways - if you are a half-time
student you can stop payins on your student loans. Here's the real beautiful part - Uncle Sam pays
the interest on these loans for you without you even knowing about it. This is a great racket.>>

I find this post somewhat offensive. Everyone pays when loans aren't paid off. Where do you think Uncle Sam gets the money ?

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Author: jpg1 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 641 of 308340
Subject: Re: IRA question Date: 2/11/1998 11:48 AM
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< < 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??? > >

You are correct, that all return is not lost on a guaranteed 9% APR; however, you ARE losing the compounding on the principal + 9% each year that the principal remains unpaid (i.e., if you have $10k that earns 9% the first year, then the second year you have $10,900 earning 9%, and so on).

In the best of all worlds, I won't touch my 401(k) balance until retirement (sacrificing short term gratification for a long-term bonanza). However, if I find myself in a real financial bind, I can always borrow from it as a last resort. A lot depends on your "life" philosophy; it is fairly easy to illustrate, however, that borrowing from your 401(k) will likely diminish your long-term total return substantially.

Good luck.

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Author: TchrP Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 648 of 308340
Subject: Re: IRA question Date: 2/11/1998 2:21 PM
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BeavisN is making some assumptions about my situation that aren't warranted. First of all, returning to school in order to avoid paying off student loans only makes sense if you *want* to return to school or if further education will qualify you to earn more - if you don't, it just inhibits your earning capacity.

So a lot will depend on whether I decide to work on yet another degree after this one. If so, it will certainly make sense to use student loans now.

Second, the sort of teaching I do doesn't qualify for any of the loan-cancellation options.

Third, it's implicit in my reasoning that I'm not very young. That's how I happen to have enough in TIAA to make it worth borrowing, but it's also a reason that I will want to return to full-time work as soon as I can.

As for why TIAA: I've placed much more in CREF, and I would not consider borrowing from the CREF account.

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Author: BeavisNButthead One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 656 of 308340
Subject: Re: IRA question Date: 2/11/1998 5:56 PM
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<<
BeavisN is making some assumptions about my situation that aren't warranted. First of all, returning
to school in order to avoid paying off student loans only makes sense if you *want* to return to
school or if further education will qualify you to earn more - if you don't, it just inhibits your earning
capacity.>>

Hi TchrP!

Thanks for the add'l info.

Point well taken about getting education for education's sake, assuming earning capacity has a higher intrinsic value to you than learning (it does for most people, anyway).

<< So a lot will depend on whether I decide to work on yet another degree after this one. If so, it will
certainly make sense to use student loans now. >>

But remember as well, you don't have to pay on Perkins Loans while you are in school, so the money in your retirement account continues to grow and multiply! If you are stuck getting SLS loans, then you have a problem and borrowing against the TIAA may make sense.

<< Second, the sort of teaching I do doesn't qualify for any of the loan-cancellation options.>>

Okay. Just a suggestion, as well as to inform others about the benfits of student loans.

<< Third, it's implicit in my reasoning that I'm not very young. That's how I happen to have enough in
TIAA to make it worth borrowing, but it's also a reason that I will want to return to full-time work
as soon as I can.

As for why TIAA: I've placed much more in CREF, and I would not consider borrowing from the
CREF account.>>

If you are then at a school/university that lets you move your stuff, why not then put all your elections into CREF? I could see the desire for fixed income if you were within 5 years of retirement, and you did say you were 'not very young', but also since you are going to school full-time to earn a degree to return to return to full-time work, I will guess that your retirement is some years off, and your age probably begins with a 4, maybe a 3. In that case, the return on CREF kills the return on TIAA.

Good luck on your degree, huh huh huh,
BeavisNButthead

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Author: BeavisNButthead One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 658 of 308340
Subject: Re: IRA question Date: 2/11/1998 6:09 PM
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**
<<The beuaty of student loans are there are so many ways to get out of paying them off or to have
them interest-free. I still have 2 student loans that are almost 8 years old that aren't paid off yet. I
could easily have paid them off many times, but I don't because there are many ways to defer the
loan payments with no interest. Going back to school is one of those ways - if you are a half-time
student you can stop payins on your student loans. Here's the real beautiful part - Uncle Sam pays
the interest on these loans for you without you even knowing about it. This is a great racket.>>

I find this post somewhat offensive. Everyone pays when loans aren't paid off. Where do you think
Uncle Sam gets the money ?**

Hi RecoveringFool!

Hmmmm. I'm sorry you find this offensive. I don't find it any more offensive than not paying taxes on the amount of my income that I donated to charity.

If I'm going to have the choice of oweing $x now or $x several years later, isn't it obvious what the Foolish decision is? Why pay off loans with X 1998 dollars when I can pay them off with X future dollars? What do I care who pays the interest, whether it's the bank, the university, or a collection of Wise and Foolish individuals? I'll let my money ride in the Foolish stock market.

Huh huh huh,
BeavisNButthead

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Author: rndll75 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28025 of 308340
Subject: Re: IRA question Date: 2/24/2000 3:07 AM
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I believe the key word here is RACKET!

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