Question for the Financial Types here
 

What is the deal about borrowing from one's 401k?

Assuming the company allows it,

-is it considered a loan or a withdrawal?
-assuming it is a loan, is there interest?
-does it avoid the premature withdrawal penalty?
-how does one make payments on the loan?

Thanks in advance guys.

According to "Suzie Q" or whatever her name is on msnbc, in the end, it's like barrowing from Peter to pay Paul! And she advises against doing such!

Sorry I can't be more specific, I'm no expert, but i did stay at a Holiday in last night!.............BB :D

1) You are loaning yourself the money
2) There is interest. You pay principle and interest to pay it back in 5 years. If the loan is for a house, it can be 10 years.
3) This is not a withdrawl. However, if you leave the company, you will have to pay the outstanding portion immediately.
4) It is normally deducted from your pay, or taken from your normal contribution.

I recently did the same to fund an addition to the house.

Everything I've ever read says to do two things:

1. Put the MAXIMUM amount allowed by your company into your 401 K.

2. Never take it out before retirement.

I wonder if it'd be worth it to make a down payment on a house that would appreciate a great deal in a relatively short time (ie here in the DC area market), but I wouldn't risk it. It's your safety net for the future.

Once upon a time, my ex-spouse and I were surprised by the extent of the marriage tax to the tune of owing - holy crap! - $10,000, with about ten days to come up with it. We determined we could do a withdrawal from a 401K immediately, as long as we could replace it in 60 days without penalty or interest. We used this to pay the tax bill. We then had sixty days to acquire other financing (namely, a home equity line of credit) which we could use to pay back the temporary 401k loan within the 60 days. We were thereby able to avoid the ire of the IRS. And then we, you know, increased our withholding in both the financial and the nonfinancial sense.

So, my point is, it can be a handy emergency slush fund, but taking money out for an extended period of time, or withdrawing early and paying penalties associated with that, is generally a bad idea.

It's never a bad idea if you really need the money, pay the tax and enjoy life.

Really. Question is, what are you borrowing it for what reason? To buy a big screen TV? No way. To put a downpayment on a house? Perhaps.

I should have been more clear, I rank my expenditures on a scale from 1 to 10 - a 1 being a George Foreman grill to replace the three I already have and a 10 would be to fund a liver replacement. I rank taking from the 401K a solid 7.

You have three George Foreman grills? Whatever for?

He likes George and his sons named George.

Borrowing money from a 401k for emergencies is probably acceptable, but to borrow from it for luxuries like a vacation or a new car is not a good idea.

The key component in the growth of your money over time is compounding interest.

Compounding interest has been described as the 8th wonder of the world.

And it is.

When you borrow money from your 401k, you are taking the money out of the market, and it is no longer compounding.

It makes an enormous difference in the amount of money your would have had you not have borrowed. (that sure is an akward sentence).

Gifts........

More your mercedesshop friends? :D

I forgot to mention that a new Ferrari is also an acceptable use for a 401K and sometimes a better investment.

Buying and selling Ferraris could be a better alternative to a 401K.