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Assuming that I will not lose my job. Should I pay back my 20l loan all at once or keep having deductions from my paycheck? The money I would use tp pay it back is presently in a brokerage account(stocks).


Thanks.
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Sorry I meant 401k loan.
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Your 401K loan can be called at any time--usually if you change jobs, but sometimes if your employer changes plans. Hence, it is always a good idea to have the resources available to refinance or pay it off quickly if need be. If it is called and you fail to pay it off, the loan becomes a penalty distribution. That means an additional 10% penalty in addition to paying income taxes on the outstanding loan amount. Depends on your tax rate, but that can come to as much as 50% of the loan amount by the time you include state and local income taxes.

But once you have the reserves to pay off the loan when needed, you can relax. What was your rate of return on your brokerage account last year? What was your rate of return on your 401K account last year? If one has a clear advantage in return (after any interest paid on your 401K loan) that could be your best investment.

Other things being equal, paying off the loan is most conservative.

Some would suggest that 401K is preferable place to invest because your gains are tax free, but eventually taxes must be paid at ordinary income tax rates. Hence, long term investing, paying capital gains rates in a taxable account can be a better deal if you can successfully pull it off.

Looks like a coin toss depending on your circumstances.

Good luck.
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Yes, you should pay it back, and let me explain why.

The counter-intuitive thing is that the interest rate on a 401K loan is nearly irrelevant. You're paying interest to yourself (well, your 401K) so its not really costing you anything, its just moving money from one pocket (your paycheck) to another (your 401K).

However, the *real* cost of your 401K is in lost returns. The interest, dividends, and capital gains that you would earn on the money. The cost of this varies from year to year depending on the market, but, on average, chances are, will be around 10%. That's a pretty expensive loan.

But, as you may point out, you have the money invested right now in a brokerage account. Well, that may add another level of thought, but, to me, makes the answer even more conclusive. Assuming that the category of equities you are invested in the taxable account is reasonably equivalent to the types of funds you would have in the 401K, then the main difference is that you are currently paying taxes on any gains, and in the 401K all that would be tax deferred (if this assumption doesn't hold, then the question becomes much messier). So, the only difference between keeping the money in your brokerage and using it to pay of your 401K, is that here the gains are taxed immediately, and there they are tax deferred for years.

Seems to me moving the money back into your 401K is the answer.
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pauleckler: "Your 401K loan can be called at any time--usually if you change jobs, but sometimes if your employer changes plans."

You sure?

I ask because the only reason my 401-k loan is callable is default in payment.

And I long ago left that employer.

Further, the employer has changed plan administrators several times.

Regards, JAFO
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JAFO, you have been on these boards as long as I have. We certainly do have people posting stories that their loans were called when plans changed or they lost their jobs. And if you are not able to replace the borrowed funds if that happens they become a penalty distribution.

Did they change the law?

My posting is not based on personal experience, but on previous postings on these boards.
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We certainly do have people posting stories that their loans were called when plans changed or they lost their jobs. And if you are not able to replace the borrowed funds if that happens they become a penalty distribution.

Did they change the law?

My posting is not based on personal experience, but on previous postings on these boards.


The law allows companies to continue to collect payments from the loans from former employees, but does not require the companies to continue to collect those payments. Because of the administration hassles and costs with administering payments that are not from their payroll, many companies require that the employee pay back the money within 30 - 90 days after terminating, or the loan becomes a distribution.

AJ
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pauleckler: "JAFO, you have been on these boards as long as I have. We certainly do have people posting stories that their loans were called when plans changed or they lost their jobs."

Yes.

"And if you are not able to replace the borrowed funds if that happens they become a penalty distribution."

Yes.

"Did they change the law?"

No. I have been involved in a long thread on the old REHP board about this issue today, too.

The law does not require plans to make separation of service a default under the terms of the loan. The law permits plans to do so and/or to make scheduled repayments by payroll reduction. But neither is mandatory.

Thus, some plans (and I belong to one, do no require payment upon separation of service; you simply continue making yoru regularly scheduled payments --- monthly in my case (by mailed check).

Most plans are probably as you described, for the reasons aj listed, but it is not legally reqired and I consider it worth checking the specific plan to find out what it requires.

Regards, JAFO

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