Hi all! Been scouring the forums and web around this topic and wanting to see if anyone looked at a 401K loan from another lens. While I understand some of the drawbacks and implications of a 401k loan and the fact that you ultimately still pay tax on the interest, it still intrigues me.
If i'm paying myself the 4% interest on the loan and take the funds and place them into a real estate investment that earns a 10% annual cash on cash return, wouldn't that be a potential good use of the load funds and creating two ways of obtaining interest returns (assuming the market over the same time frame performs under that)?
Not trying to oversimplify but other than the 401K issues of leaving the job and loan being due in full and missing out on 401K funds gains over the loan time frame, what am I possibly overlooking that would make this a bad idea?
Thanks for you time!
Here are the general considerations regarding 401k loans.
401k Participant Loans
- If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
- Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
- Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).