No. of Recommendations: 0
Hi,

I've read a few prior posts on 401k loans, and am looking for suggestions for our situation.

My husband has a loan out of his 401k for about $12,000 (I believe the interest rate is around 10%)

We recently received a tax-free gift of $17,000 from my mother. I'd like to use $8,000 to use as Roth IRA contributions for both of us for 1999 and 2000.

My question is, is it more appropriate to use the remaining money to repay the 401k loan, or to invest this cash in taxable investments, such as the foolish 4 or index fund?

My husband may change jobs within the next 1-2 years. His plan will allow us to continue the loan payments on our own if he leaves the company.

I believe we should repay the loan, but know that other investments may deliver greater returns.

Thank you so much for your input.

Karen
Print the post Back To Top
No. of Recommendations: 0
KBecks wrote:
My husband may change jobs within the next 1-2 years. His plan will allow us to continue the loan payments on our own if he leaves the company.

Be real careful here. Is your husband absolutely certain he can continue to pay for the loan after he leaves the company? Most 401(k)'s require full repayment of an outstanding loan at seperation. If you don't repay, they consider that a withdrawal of the outstanding loan balance, which means you're subject to income taxes and a 10% penalty. Bad postion to be in. Read the 401(k) info very carefully.

If it were me, I'd pay the loan off. Lack of debt (other than a mortgage) is a GOOD thing in my book. If things take a bad turn in the future, this is one less thing to have to worry about. It would still leave you with enough to knock off the 1999 Roth contributions (assuming your AGI allows it), with a head start on next year's contributions.

Hmmm...isn't the tax-free gift limit $10,000? Or is that $8,500 to each of you? Is that legal if you file jointly? No one's ever given me that kind of money before (poor me) so I'm not sure what the rules are here.

--DarkOut
Print the post Back To Top
No. of Recommendations: 0
DarkOut, in a great reply to KBecks, added:

<<Hmmm...isn't the tax-free gift limit $10,000? Or is that $8,500 to each of you? Is that legal if you file jointly? No one's ever given me that kind of money before (poor me) so I'm not sure what the rules are here.>>

The $10K gift limit is per person. So if mom gifted $10K to her daughter and $7K to her SIL (or any other combination to the two that totalled $17K), then the mother is in great shape and has followed the law correctly. It's always the giver, not the recipient, that has to worry. Thus, how KBecks files her return has no impact on the gift. Further, the mother could have given all $17K to KBeck without a problem if the mother's husband joined in that gift. In that scenario $10K would come from mother and the other $7K from the father, which is also perfectly legal. The parental couple in that instance would also owe no gift tax.

Regards..Pixy
Print the post Back To Top
No. of Recommendations: 0
Thanks so much for the input. I'll be talking to my husband this weekend about paying off the entire 401k loan and then increasing our contributions to retirement savings. Since I'm relatively new at making big financial decisions, I really appreciate your suggestion.

Karen
Print the post Back To Top
No. of Recommendations: 0
Hi,

I've read a few prior posts on 401k loans, and am looking for suggestions for our situation.

My husband has a loan out of his 401k for about $12,000 (I believe the interest rate is around 10%)

We recently received a tax-free gift of $17,000 from my mother. I'd like to use $8,000 to use as Roth IRA
contributions for both of us for 1999 and 2000.

My question is, is it more appropriate to use the remaining money to repay the 401k loan, or to invest this cash in
taxable investments, such as the foolish 4 or index fund?

My husband may change jobs within the next 1-2 years. His plan will allow us to continue the loan payments on our
own if he leaves the company.

I believe we should repay the loan, but know that other investments may deliver greater returns.

Thank you so much for your input.

Karen


I usually go for paying off debt but I think I would go for the Roth's and the balance to the loan. Then use any extra money you have each month to pay down the loan. You may have to pay off the loan when you leave the job. Better recheck the plan and the IRS rules.

My thinking is that you might not invest extra money in the Roths but you will pay off the loan. Therefore my leaning toward the Roth's now and debt latter.
Print the post Back To Top
No. of Recommendations: 0
Karen posted...

"My husband has a loan out of his 401k for about $12,000 (I believe the interest rate is around 10%)

We recently received a tax-free gift of $17,000 from my mother. I'd like to use $8,000 to use as Roth IRA contributions for both of us for 1999 and 2000.

My question is, is it more appropriate to use the remaining money to repay the 401k loan, or to invest this cash in taxable investments, such as the foolish 4 or index fund?"

Hi Karen,

In my 401K, 100% of the interest on money borrowed was the return for the loan. It's my guess that your loan is paying yourself 10%. (If that's the interest rate).

1st, you should assess the risk in not being able to pay off the loan. Loans not repaid are considered distributions which then will be taxed and penalized if not 59 1/2 when the loan was taken out.

If the loan payment is not a problem, then the decision hinges on whether you think the money used to pay off your loan will be re-invested in funds within the 401K that pay more than 10%.

In otherwords if your 401K is made up of GIC (guaranteed Income contracts) paying 6%, your loan repayment will be invested in GIC's paying 6% where as you could have invested the money elsewhere and had possibly a better return after tax.

If you can redirect your loan repayment to investment in equities, then it may be possible to get better than a 10% return but what you are doing is exchanging a fairly certain 10% return for an iffy return that may or may not exceed 10%.

The real question is what would you do with the other $9,000 if you don't pay down the debt? Put it into an MM fund and use it for emergencies?

How much of the additional $9,000 could you put into the 401K - perhaps $4,000 to $5,000 this year and the rest next year.

Not being indebted helps some people sleep better at night and if repayment of the debt is important then doing so may make you feel better but it may not make your returns improve.

Paying off the loan may give you more cash flow in 2000 and that mught be needed to meet some expected (or unexpected) financial drain like college or vacation or medical need.

There are no really wrong answers just alternatives that fit better or worse.

BGP
Print the post Back To Top
Advertisement