Image Credit – Pocket Watch – by Wikimedia
You’ve got a nice job with a 401(k) benefit. Chances are, you’re contributing to your 401(k) from your paycheck and getting that sweet employer match, too! Probably even contributing to the max allowed by law. You’re deferring taxes as well! Win-win!
You have less take-home pay as a result. You might encounter unexpected expenses or need to change your life circumstances, i.e., a new home. You may have accumulated CC balances. You consider taking out a 401(k) loan to cover the costs associated with your present life situation.
A few months ago, I examined whether a 401(k) loan would work out for my situation. I modeled a loan request for $25,000 (can be up to 50K) and the interest rate was 10%! Yes, I was aware that I would be paying interest to myself, and not to some bank. The high interest rate also ensures that I would be paying double taxes – I would use post-tax funds to pay interest, and then pay taxes later on distribution.
Timing The 401(k) Loan
Rather, it was the timing of a possible 401(k) loan request that worked against my favor. The stock market were hovering near their all time lows. Taking out $25,000 would be a huge opportunity cost in missed stock upside should they go up. Indeed, the stock markets rocketed 15% since I modeled this loan request!
I know there is a risk when it comes to personal finance, loans, stock markets, etc. In regards to 401(k) loans, the risk is that you miss out on stock gains while you’re repaying the loan. It would make sense from risk perspective to take out a 401(k) loan when the stock markets are near their all-time highs. By repaying the 401(k) loan, you may potentially recapture your stock holdings at lower prices when they have dipped, slid by a fair amount, or suffer an outright crash.
The usual disclaimer applies; This blog article is for entertainment purposes only. No express or implied warranty is offered, regarding any actionable information contained in this article. Laws governing investing are complex and varied. Personal finance is personal to you – no one else knows about your financial situation intimately. I encourage you to read and study information from other financial sources to gain the knowledge and expertise needed to manage your finances.
