馃攳
401k Loans: The Good, The Bad, The Ugly - YouTube
Channel: The College Investor
[0]
- Okay, did you know that you can borrow
[2]
against your 401K to
make a large purchase?
[6]
Maybe you're in a bad financial situation
[9]
and you need the money right away.
[11]
Maybe you are wanting to use the money
[14]
to pay for a home.
[16]
In either scenario,
borrowing against yourself
[20]
could be harmful.
[21]
So here's the good, the bad,
the ugly about 401K loans.
[26]
(soothing music)
[35]
Hey, guys, welcome back
to The College Investor:
[37]
Investing & Personal
Finance for Millennials.
[41]
So 401K loans, basically,
you know what a 401K is.
[45]
It's your employer's retirement plan,
[47]
and you are more than
likely saving up that money
[52]
so when you retire, you
have money to live off of.
[55]
And sometimes you are
making some large purchases
[59]
before you retire and you might be looking
[62]
at borrowing against your
401K to pay for that purchase.
[67]
One thing that we should
make clear up front,
[70]
there is a difference between a 401K loan
[72]
and a 401K withdrawal.
[74]
So a 401K loan means
that you are borrowing
[78]
against yourself and
typically you can borrow
[81]
up to $50,000 or half of
your investment account,
[86]
whichever is less, and then
you have to repay that money,
[91]
typically over the span of five years.
[94]
You'll also, when you repay yourself
[96]
over that five year period,
[97]
you'll also be paying yourself interest.
[100]
With a 401K withdrawal, it
means you are pooling money
[104]
out of your 401K with no intentions
[107]
of ever repaying that money back.
[109]
If that's the case, and
you're withdrawing that money
[112]
before the age of 59 1/2, you
will have to pay income taxes
[117]
on that money and a 10% penalty fee.
[121]
Now, there are a few exceptions to that.
[124]
If you are a first-time home buyer
[126]
and you are looking to add more cash
[129]
to your down payment, you
can withdraw from your 401K
[135]
up to $50,000 or half the amount
[138]
of what's invested in that account,
[141]
whichever is less, without
incurring that 10% penalty fee.
[145]
Of course, you'll still
have to pay it back.
[148]
But it is a way for first-time home buyers
[150]
to increase their down payment amount.
[153]
The second way is, as of March 27th, 2020,
[157]
in the CARES Act due to
the coronavirus pandemic,
[161]
investors were allowed to
withdraw up to $100,000
[165]
from their 401Ks without
incurring that 10% penalty.
[169]
But back to the 401K loans,
[171]
I mean, you're borrowing against yourself
[173]
and then you're paying yourself interest,
[175]
so it can't be all that bad, right?
[177]
You're just dealing with you.
[179]
So a way that you could
work this to your benefit
[182]
if you overpaid in your retirement.
[186]
So you have tons and tons of money
[188]
in your retirement account,
[190]
which means you don't
really have a lot to pay
[192]
for short-term purchases,
like maybe a car,
[196]
maybe somebody's wedding,
education, that sort of thing.
[200]
You can use that money if you have a lot
[202]
in your retirement account as it is.
[205]
The second way is you can use it
[207]
to top off a down payment.
[209]
If you don't have a ton of cash
[211]
or maybe you've been
saving for a down payment,
[213]
but you'd really like to bolster it a bit,
[216]
you can use some money from
your 401K to top it off.
[221]
In addition to that,
you can use a 401K loan
[224]
as a bridge loan.
[226]
So this also has to do
with real estate investing.
[229]
If want to use that money
to pay for a new house
[234]
and you're still working
on selling your old house,
[237]
this is a way for you to get
into that new home faster
[241]
while you work up sprucing your old home.
[244]
So you're basically just
shuffling money around
[247]
so that you can free up money
[249]
from the sale of your old home,
[251]
repay yourself into that 401K loan,
[255]
and then you're into this new home.
[257]
It's a lot of moving parts,
[259]
but that's basically
one way you could do it.
[261]
The last way that you
could use a 401K loan
[264]
to your advantage is to
pay off high-interest debt.
[267]
If you have credit card debt
[269]
and you don't qualify
for a balance transfer,
[272]
then you could use a 401K loan
[274]
to pay off the high-interest debt,
[277]
then go back to repaying yourself
[280]
through the 401K loan with
a lower interest rate.
[284]
But here's the thing, a 401K loan is debt.
[288]
It's still debt.
[289]
It's still debt that you have to pay back.
[291]
It's still money that you owe.
[293]
So the bad thing about a 401K loan
[296]
is that the repayment is
made with after-tax dollars.
[301]
A 401K account, you use pre-tax
dollars to contribute to it,
[306]
but when you're in a repayment
period against your 401K,
[310]
you're using after-tax dollars
[312]
to go back and repay yourself.
[314]
Also, you're not eligible
on your employer match,
[317]
so there's no matching period
[319]
when you are repaying a 401K loan.
[322]
So the third thing that
makes 401K loans bad
[325]
is that you can't contribute to your 401K
[329]
during the repayment period.
[331]
In other words, you can't
have that pretax contribution
[334]
and the repayment at the same time,
[337]
which means you could miss
out on your employer's match.
[340]
And lastly, you just
lose time in the market.
[344]
When you withdraw that money,
[346]
when you take out a 401K loan,
[348]
that money is no longer invested,
[350]
which means you're no
longer getting those returns
[352]
like you were when the money was invested.
[354]
So you end up losing
out on potential gains
[357]
in that investment account.
[359]
For the most part, 401K
loans are like any loan.
[362]
You need to be very cautious
[363]
and understand what the consequence are
[366]
if you don't repay this loan.
[368]
Now, here's the ugly.
[370]
Here's the ugly truth about this.
[372]
If you lose or leave your
job and you had a 401K loan
[377]
through your employer,
your loan amount is due
[382]
by that following tax
return deadline, April 15th.
[386]
If that doesn't happen,
then any amount remaining
[390]
is subject to taxes and that penalty fee.
[393]
Now, this can be especially difficult
[396]
if you have that money
tied up in real estate
[399]
and you can't really get liquid cash
[402]
to pay off that loan.
[403]
This could set up for a lot of
additional headache and fees,
[408]
and you just don't wanna deal with that.
[410]
The second ugly truth about 401K loans
[412]
is that you could end up using this
[414]
as a revolving line credit
or as an emergency fund.
[417]
But here's the thing, 401Ks are
[420]
not short-term savings accounts.
[422]
This is your livelihood
during your retirement
[426]
that you are borrowing against from,
[428]
which can be really
harmful and detrimental.
[431]
Most of the time, you wanna
keep money in your 401k
[434]
as much as possible to
let that grow over time.
[438]
If you find yourself continuing to go back
[441]
to a 401K loan over and over again,
[443]
you'll have to go back to
your spending and your income
[447]
and take a look at what's
going on month-to-month,
[450]
and see where you can budget
and start streamlining things
[454]
to create better balance.
[456]
The third thing is if you
can't pay back your loan,
[459]
you really put yourself
in a tough predicament.
[462]
You will be subject to those
tax and withdrawal penalties,
[465]
and it's just not good.
[467]
At the College Investor,
we're all about ways
[470]
to grow your money and invest
it, not borrow from it.
[473]
Ideally, you'll have the cash saved up
[476]
for these types of purchases.
[478]
You'll have an emergency
fund put into place
[480]
for emergencies like job
loss or unexpected expenses,
[485]
and you'll have a savings account,
[487]
high-yield savings account
or a brokerage account
[490]
to help you pay for a
car or a down payment
[494]
or education expenses.
[495]
Whatever it is, you can
build in these savings
[498]
into your monthly financial habits
[501]
so you don't ever have
to look at a 401K loan.
[504]
They're just not a good idea.
[506]
Carefully consider your
options before stepping
[509]
into a 401K loan.
[511]
Now, if you want more ways to practically
[514]
save for a large purchase
or invest your money wisely
[518]
to build that wealth, be sure to check out
[520]
all of our free resources
at thecollegeinvestor.com.
Most Recent Videos:
You can go back to the homepage right here: Homepage