Investor · Roy, UT · Member since 2016 · 1 post · 0 votes
I'm currently deciding on if I should borrow from a 401k to pay down a Heloc or apply to mortgage. Currently, the Heloc has a loan amount of $45K @ 5.49%. Funds from the 401K can be borrowed @ 2.125% interest for a period of 5 years. The issue is instead of paying off the Heloc, I can apply funds to my rental properties and pay them off sooner. The goal is to apply principal monthly to my 4 rental properties to pay them off in 6 years. The Heloc interest of $213.00 will still be payed monthly and any add'l funds received after mortgage principal is paid would be applied.
Using a 401k loan in this situation is a losing proposition. In addition to the 2.125% interest you will pay on the 401k, there are two "hidden" costs to this transaction: A) the opportunity cost of not having those funds within the 401k and compounding interest, and whatever your tax rate is.
When you borrow from a 401k, there are no taxes or penalties assuming you pay off the loan properly. However, you put that money into the plan pre-tax, and will be replacing the borrowed funds with after-tax dollars.
Using a 401k loan in this situation is a losing proposition. In addition to the 2.125% interest you will pay on the 401k, there are two "hidden" costs to this transaction: A) the opportunity cost of not having those funds within the 401k and compounding interest, and whatever your tax rate is.
When you borrow from a 401k, there are no taxes or penalties assuming you pay off the loan properly. However, you put that money into the plan pre-tax, and will be replacing the borrowed funds with after-tax dollars.
The decision depends on the situation. We feel there has to be a real tangible benefit that outweighs the cost of the money. Starting a business or a very high-profit flip, when other sources of funds are not available would be examples. The decision also hinges on balancing the other primary objectives of the 401(k) over the long term.
If you have significant 401k savings, then taking a bit of a hit in order to really get the ball rolling on something positive can be a worthwhile trade off.
If borrowing from your 401k is a desperation move, or grasping at the idea of something that is not realistic, then you are better off leaving those funds in the 401k.
Please do not post these "golden rule" advice without backing it up with facts. I get sick and tired reading these kinda of things.
All, run the numbers and think for yourself. In this case if you are able to beat the stock market even after taking a tax hit for early withdrawal (15-35%) then your better off using the 401k.
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
10y
@Michael Clay
The loan interest rate for a 401k loan that you are describing may be to aggressive as the IRS has come out and said that a prime rate plus 1 is generally the norm. The prime rate just went up from 4.25% to 4.50%.