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.

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Jennifer
90 350sdl

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

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.

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Michael LaFleur

'05 E320 CDI - 86,000 miles
'86 300SDL - 360,000 miles
'85 300SD - 150,000 miles (sold)
'89 190D - 120,000 miles (sold)
'85 300SD - 317,000 miles (sold)
'98 ML320 - 270,000 miles (sold)
'75 300D - 170,000 miles (sold)
'83 Harley Davidson FLTC (Broken again) :-(
'61 Plymouth Valiant - 60k mikes
2004 Papillon (Oliver)
2005 Tzitzu (Griffon)
2009 Welsh Corgi (Buba)

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.

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Current:
2014 VW Tiguan SEL 4Motion 43,000 miles.

2016 Hyundai Santa Fe Sport (wife's).

Past:
2006 Jetta TDI 135,970 miles. Sold Nov. '13.
1995 E-320 Special Edition. 220,200 miles. Sold Sept. '07.
1987 190-E 16 valve. 153,000 miles. Sold Feb. '06.
1980 300-D 225,000 miles. Donated to the National Kidney Foundation.
1980 240-D manual, 297,500 miles. Totaled by inattentive driver.

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.

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http://webwench.net/albums/new83-300...1700.thumb.jpg
1983 300D-T
348,000 miles

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.

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You don't need a weatherman to know which way the wind blows - Robert A. Zimmerman

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?

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You don't need a weatherman to know which way the wind blows - Robert A. Zimmerman

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).

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Paul S.

2001 E430, Bourdeaux Red, Oyster interior.
79,200 miles.

1973 280SE 4.5, 170,000 miles. 568 Signal Red, Black MB Tex. "The Red Baron".

Gifts........

More your mercedesshop friends?

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You don't need a weatherman to know which way the wind blows - Robert A. Zimmerman

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.