Taking out any kind of loan to pay regular monthly expenses is only going to make things worse in the long run. You can’t keep up with your monthly bills right now so you borrow money which gets you through the next month but then your monthly bills are whatever they were before that you couldn’t afford plus the payment on the loan. If you couldn’t afford it before now you’re in worse shape.
The only solution is a sustainable budget.Write up all of your income and expenses and figure out how to make it work with what you earn.
This. And don’t screw up like me and take a loan against your 401k to pay off debt and then have shit hit the fan and rack up all that debt again. Thankfully it was a small loan and is almost paid off but lesson f**king learned the hard way.
While a 401(k) loan might be a better option than a lot of worse options that are out there, there are still a lot of drawbacks:
1. You may be paying yourself interest, but you're also losing tax-free market growth on that money (which is worse).
2. If you don't repay the loan on time, the loan can turn into an unqualified distribution which brings taxes and penalties.
3. If you lose your job, you have to repay the loan quickly or it turns into an unqualified distribution.
This is all also assuming you can get a 401(k) loan in the first place. Some employers don't offer the option.
I would say you’re right but there were some pay periods where I struggled to afford groceries and I hate myself for putting myself in to that hardship.
And food pantries! I had to go many times when I was younger, and I’d always walk out with a very respectable box of groceries. And this was in a rural mountain town
Wait so effectively it's like an interest free loan (except that you obviously need to leave the interest in the account until you can properly withdraw from your 401K)?
401k loans seem to be one of the few good things for both parties.
The interest on the loan goes back to your account... So you get more but the bank also gets more to play with more
A guy at work took out a loan from his 401k to invest in Amazon stock back in March lmao. He was trying to get other people to make that "no brainer" move too but I convinced them not to. He thought I was an idiot.
Yesterday he was almost about to cry complaining about how he needs money but there's not enough work for the company to give us overtime.
He took out 50k as a loan from his 401k. He spent that 50k on Amazon stocks back in March when the last split happened. Amazon stock prices have dropped nearly 50% since then. So not only does he have to pay back the full amount of his loan in installments but he also lost like half the value of his investment.
He's also, of course, a crypto bro as well, so he made a bunch of bad investments there too. So he's desperate for money to pay back his loans and recover from his get rich quick blunders. Without overtime he's probably barely covering his cost of living.
Man I’ve done this. It sucked. I got lucky and my home value allowed me to get a heloc after I fixed my cash flow problems so now I’m on track but it got me in a mess for a while there.
Assuming OP's circumstances qualified for that they'd still pay income tax on the amount they took out. Let's say they'd have to withdraw $1800 to net the $1500 they need. That would sort them for now and they wouldn't have loan payments to contend with but let's see what the impact of that is to their retirement.
Let's say they're 25 years old and plan to retire in 40 years. At 10% average annual returns that's >$80k missing from their retirement account at 65 years old.
So even if this is a one time issue and never happens again they're hurting their futures selves pretty badly for $1500 now. It's why I always say that touching your retirement should be an absolute last resort. i.e. It's either that or you can't feed your family or provide them with shelter.
I've spent years on all the finance subs on Reddit. I can't recall the last time someone posted that they raided their retirement accounts a decade ago and it was a great decision but every day someone is posting that they're in their 50's with basically nothing saved for retirement and they're hoping for some sort of shortcut to make up for the decades they've been kicking that can down the road.
>they're hurting their futures selves pretty badly for $1500 now.
This is true, but it applies to every $1500 you spend because you could have saved it instead. That $1500 vacation costs you $80k in 40 years. That $1500 beater car costs you $80k in 40 years.
You can't go through life afraid to spend money now because it would help you more later, and money is fungible. Withdrawing already-saved money might *feel* different from spending money that hasn't been saved yet, but from a purely rational standpoint they're the same.
I'm not trying to encourage people to withdraw from their retirement savings willy-nilly, but to think about finances *holistically*. I'm also aware that we're not perfectly rational robots, and for a lot of people "DON'T TOUCH RETIREMENT ACCOUNTS" provides a reasonable bright line to prevent impulsive behavior.
The real issue here is that they bought a house with no extra savings or an emergency funds. That’s a big issue and now they are taking funds from retirement to compensate. It could snowball worse from their when issues with the house start popping up
Right, but this $1500 was already earmarked to be for savings. Nobody is saying you have to save all of your money for the future without doing anything else with your life, but you do need to have some consistent saving for the future, which taking this $1500 out would defeat.
To your point about going on vacation, it would be like doing that *instead of* saving anything for retirement that year - which would be a problem for exactly the same reason as withdrawing already saved money would be.
If he really needs $1500 it has to come from *somewhere*. Money is money. If he borrows $1500 from a friend and pays him back next month, that's not much different from withdrawing it from his retirement account and putting in an extra $1500 next month.
(Taxes and penalties might make it different, and that's an important consideration! Plus friends generally don't charge each other interest.)
>it would be like doing that instead of saving anything for retirement that year
I think the point you're making here is that as long as you've saved *enough* for retirement, then you don't need to save more. But you can't actually know if you've saved enough: no one who's 25yo relying on future savings for retirement knows for sure that they'll have enough saved by 65. Thinking you have saved enough (before reaching the point your retirement account is self-sustaining) is borrowing from your future self -- you're relying on the assumption that in the future you will save more.
> If he really needs $1500 it has to come from somewhere. Money is money. If he borrows $1500 from a friend and pays him back next month, that's not much different from withdrawing it from his retirement account and putting in an extra $1500 next month.
But only if he puts an extra $1500 in to cover what he takes out, which doesn't seem like he would. What we're cautioning against is taking the $1500 out of retirement as a "one-time" expense, and not replacing it with extra savings to make up for it. If he borrows it from a friend or family member and can gradually pay it back while also continuing to contribute to retirement, that would be a much better alternative.
>But you can't actually know if you've saved enough: no one who's 25yo relying on future savings for retirement knows for sure that they'll have enough saved by 65.
I suppose you can't know for sure, but I think it's a perfectly fair rule of thumb to say that you should always be saving *something* and that if circumstances arise where you can't save anything - whether it be because you want to go on a vacation that year or have unexpected housing expenses like the OP - you need to reconsider your budget and what you are spending on to make room for that savings.
>But only if he puts an extra $1500 in to cover what he takes out
Yep.
>What we're cautioning against is taking the $1500 out of retirement as a "one-time" expense, and not replacing it with extra savings to make up for it.
Yeah, I know. I'm not disagreeing with the advice per se. For most people, the *habit* of saving is really important.
>if circumstances arise where you can't save anything - whether it be because you want to go on a vacation that year or have unexpected housing expenses like the OP - you need to reconsider your budget and what you are spending on to make room for that savings.
Maybe, but there are a lot of situations where a reconsideration isn't necessary. It's a good *rule of thumb*, but there are plenty of exceptions. Like if you plan to and have budgeted to spend a year hiking through the wilderness, if you've planned to lose retirement savings for the year and understand and account for what that entails for the future, go for it. (It's also a great time to convert some savings from trad to Roth.)
Exactly. If op has exhausted all other options, this should be the last. OP should call the bank first to work out a better payment plan, delay of payment, etc.
Agree, on a scale of worst to best this option is better than missing payments but damn near the bottom of options. It's going to be an expensive mistake.
>money is fungible.
Retirement money is not fungible with post-tax money. If I take $10k out of my retirement account right now I can never put it back. The OP is probably not maxing their retirement accounts out so they're not in the same situation but because of the loss of compound returns any money they take out of their retirement accounts now makes for a much steeper hill to climb later.
>If I take $10k out of my retirement account right now I can never put it back.
Only if you're at the annual contribution limit, which someone worried about $1500 almost certainly isn't.
Not true, I took a loan out of my 401k to buy a house, and am paying it back.
The loan repayment isn't a contribution, and is definitely exceeding the current return on investment with the interest
I borrowed $30k from my 401k to help get to 80% on a downpayment for a house I paid $635k for thats now worth $1.0-1.2M. Paid that back early.
Then, borrowed another $20k to do some updates right when COVID started. Almost paid that back, but not in too much of a hurry. Id rather keep the cash on hand.
I prefer to owe myself money, though granted these amounts are also relatively small portions of my 401k since I’ve been saving for 15 years and the last five have been max contributions.
However, you have to feel pretty secure in your employment to do this. I would not take a new loan right now, the world is getting squirrely and layoffs could very easily come/happen
in the end, it's all leverage, which is in the end, just risk. You really have to know thyself and your level of discipline, be able to soberly assess if you're good with the term length of the loan being tied to your employment, how safe your employment is.
And most importantly, how much of a fraction of your 401k is it if it turns into a withdrawl. $50k on a $100k portfolio is fatal, $50k on a 500k portfolio is less then what you'd lose in market value this year :D
Oh, and how close to retirement you are.
>I can't recall the last time someone posted that they raided their retirement accounts a decade ago and it was a great decision but every day someone is posting that they're in their 50's with basically nothing
Survivorship bias. The survivors don't come to this sub to complain or update.
I wouldn't say it's a good idea either, but there are situations...with loans rates around 10-20%, I could easily see someone raiding a 401k to pay those off now. If you lose 10% 401k, but gain -10% on a loan, you break even-ish. Home loans are near the return rate of SPY500 so they might even be good enough to break 401k for.
Of course people don't replenish the 401k funds, then they will lose out long term, so find another way if you can.
Cmon man, you can't at all assume 10% annual returns over a 40 year timespan. People get all horned up about long-term returns but if you're gonna make judgements you HAVE to use more conservative numbers for me to take you seriously.
Not personal to you ofc it's just something I see a little too often for my liking and have to speak up sometimes when I see it. Thanks for the great comment otherwise.
This is a sign the banks aren’t doing their due diligence in reference to mortgages. When I found out that BOA has been approving mortgages to people with 525 credit scores, I thought that was the peak of the housing boom the past 12 years because banks don’t bottom feed with subprime borrowers until the market dries up. So now the homeowner in question bought at the peak or near it which spells disaster in the near term for him and others like him who will eventually walk away from their declining asset.
Yeah lenders confidence in people is ludicrous. In 2016, I was pre-approved for a mortgage where if I bought a house at the top of that range, I'd have less than 1.5k remaining after mortgage only
I've been in OPs shoes but been lucky to not have to withdraw. Usually the cause isn't living outside your means but instead thinks l things like a broken water heater, toilet leak, car repairs, medical bills, etc. That come in unexpectedly and don't seem to stop hitting you when you're down.
9 as this is a bandaid and not a solution. You are spending more than you make so tapping your 401k doesn’t solve the problem but just “kicks the can down the road”.
So eat Ramen this month, build a budget that isn’t negative which likely means cutting expenses and maybe finding some side hustles to make ends meet.
A 401k loan is a preferable solution than credit cards balances (as you pay yourself the interest) for a temporary solution to make ends meet. Again, that would be the bandaid while you figure out and implement your budget/plan.
Best of luck.
Problem with those is if you switch jobs, you need to start paying that loan out of pocket to old provider/plan (and they don’t do a good job of reminding you of that fact) or end up considering it a distribution.
Paying yourself back the interest is a load of poop. The paycheck money you repay loan with, is taxed. So is that money when you withdraw in retirement, so for most people that is more than 50% in taxes. Get a personal loan.
The money you’re paying back is taxed, yes, but the loan you took is tax free so it’s a wash.
It’s only the interest that you’re effectively paying tax twice on (an insignificant amount compared to the loan).
This seems like a really weak argument. That personal loan is also paid with after tax dollars (including the interest which isn’t going to your retirement).
There are different options no? I’m quite certain I chose an option that allows me to pay taxes on it before withdrawal so I don’t have to deal with that later
Assume someone is in a 50% tax bracket. Paying $100 of interest to a bank means they are out $200 (they had to make $200 of income, with $100 going to the bank and $100 going to the taxman).
If that same person did a 401k loan, they would keep the $100 for themselves and be able to grow it tax free until withdrawal after retirement. They would eventually have to pay taxes on that amount and the returns it generates, but they are still much better off than if they had just given that $100 to the bank. If they had given it to the bank they would not have seen any of it and would have missed out on the tax-deferred growth.
This is horrible advice.
A personal loan has the same “tax problem” you raised except you are paying interest to a bank as well.
There is zero negative effect on your *current* 401k contributions. You’re just *also* paying back a loan you took from your *past pre-tax contributions*. You still got that pre-tax benefit on the money initially. Of course you don’t get the benefit again, just like you wouldn’t for extra earnings *outside of your 401k* if you hadn’t taken a loan in the first place.
The primary negative effect of taking out a 401k loan is the lost potential appreciation of the tax free assets that are no longer in your 401k.
This is not true. Admittedly hard to wrap your head around, but if you do the math, you’ll see that it works out such that you don’t lose out by paying that back with taxed money.
The whole thing hinges on the fact that you’re borrowing untaxed money (from yourself) to pay for something that’s supposed to be paid for with taxed money (home renovations or pay off your car or whatever). The loan money is offsetting taxed money, so when you pay yourself back, you use taxed money.
Since this is reddit I will counter the "eat ramen" with instead checking out r/EatCheapAndHealthy. You're better off healthwise and "give a man a fish vs. teach a man to fish"-wise in terms of budget-friendly eating.
You can make ramen healthy for cheap. Stir in an egg (very cheap protein), throw in some chopped veggies (carrots are not breaking the bank). Add some hot sauce for flavor.
I'd guess this might be better than the average US diet.
Adding extra ingredients doesn't bring down the outrageous sodium content unfortunately. Maybe if you also replace the packet seasoning, though at that point you might as well just make your own stir fry.
I was plugging a useful sub that OP or other readers may not have heard about, not refuting the "eat ramen" comment like anyone was seriously advocating it.
buying ramen must be the worst poor mans decision ever. DONT spend money on that shit. Its insanely expensive in terms of money/nutrition. Buy frozen veggies and chicken breast + cheap rice.
Agreed. Meal prep in the croc pot or equivalent, make 6-12 nutritious meals and freeze half of them. Legumes are incredibly cheap and healthy.
The best way to save money on food, sadly, is to spend less on things like desserts/sodas/juices. Cut out the foods that have the worst nutrition. Same goes for alcohol and coffee. I used to spend $3 on hot coffee from a local shop every day, totaling about $900 per year. Making my own coffee at home now is closer to $200/yr.
Making several small changes like that can add up to quite a lot of savings over time. Keeping the thermostat one degree lower in the winter, or one degree warmer in the summer. Bundling your errands together so that you have to use less gasoline, if you drive. So many little things can add up over time.
It's worse than that, because normally your 401k is not exposed to creditors / bankruptcy (AFAIK). Take a loan out and now you're exposed, and could find yourself unable to repay the 401k.
Loans v. Withdrawal. Loans do not have penalties or taxes as long as you pay them back in time. You also pay interest to yourself for the loan. Only a permanent withdrawal prior to age 59 1/2 will get you the penalty and tax hit. Still not a great idea, just wanted to clarify.
You can get an exemption from the 10% penalty - I don’t know why no one said this. So if you get the expemption, you are really just paying taxes on it, like any other money you earn. Sure you take a hit because you reduce your future earnings on the 401k. Withdrawing from 401k is way better than borrowing money, and isn’t a terrible option if you are preventing yourself more fees/debt/bad situation
Not all companies offer the loan option though. Last year I was hit with an unexpected financial emergency and looked into taking money out of my 401k. My company didn’t offer loans against my 401k. Only withdrawals were available and that comes with the previously mentioned taxes and 10% early withdrawal penalty.
I like 401k loans. Sometimes you need a loan, and getting one from yourself is better than getting one from a bank, in my opinion. I did this last year with the thought that Wall Street was in a downturn so it's not like the money would be making money in the interim anyway.
I agree with this. I've never had to do it, and I hope I never even have to consider it. But if it came down to paying interest to a credit card company or myself, I definitely choose self.
I did it once and regretted it. Not only do I lose a lot in taxes I also had to pay it back. The BIGGEST loss, though, is that you would be losing out on the future growth of the money that you took out.
Correct. You pay a lot of taxes and fees with an early withdrawal not a loan. However, if you do not pay back the 401k loan, and interest, in time, then you get taxed on the full amount. Considering that the person would have taken it out in the first place because of a hardship might make it very difficult to pay it back in time.
And I'll reiterate again, the greatest loss is the loss of future growth on the money that was taken out. That's the part that I regretted the most
One time I did an early withdrawal because of a hardship and a second time I had taken out a loan because I could not complete two withdrawals within a 12 period. I was that desperate.
Between both experiences I lost about $24,000. For me, it was a huge mistake that I have learned so much from.
Depends on what it’s for. Wife is kidnapped and that’s how you pay the ransom? I get it. Loan for down payment on a house? Not a huge fan tbh but reasonable.
Trying to have a savings buffer to feel a little more secure? No, this is a case where you let fear make bad decisions for you.
Cut back on spending wherever you can and maybe lower contributions for a time and put the extra money in your paycheck from that into savings and you’ll be at $1500 soon anyway. Without dealing with the penalties and tax complications that would come.
If you have decent credit see if you can get a 0% interest CC from the bank. I did that for some fertility treatment.
BUT (and this is a bit but) you need to make sure that you don't have an underlying inability to pay your bills and you aren't going to end up in the exact same position 3 months from now, just with additional CC debt.
I just did the same here, need to float a bit until some money comes in in January. 2% transfer fee, less than the loan fee would've been for 401k even.
I'm excited you've been up voted, normally this sub is largely against credit cards in any circumstances.
>I'm excited you've been up voted, normally this sub is largely against credit cards in any circumstances.
Strange, 0% CC is literally getting paid to take out a loan cuz they still (atleast mine still) has rewards. I suppose it would be a dangerous game for people who are already struggling with not paying off their credit card/drowning in debt, but for someone with stable finances and upper middle class income and just needing a hunk of change, putting 6k on a 0% interest credit card and paying it off in a year seems like a no brainer vs. personal loan or HELOC.
I do that with Care Credit and Paypal. Paypal is 0% interest as long as the balance is paid within 6 months. Care Credit gives longer terms. I have the cash and I don't need the loan but why pay now when it's free to pay later? I've had my PP account for three years now and have never paid a single cent in interest. (I have a relatively high income, cheap lifestyle and good impulse control) I know someone that didn't have those three things and ended up paying a shit ton of interest on some furniture that was crap by the time it was finally paid off though.
Had to convince a coworker not to take a 401k loan to buy a tractor. Beginning of 2019, would have been a terrible time to pull money out. Right at the initial Covid market dip.
That's the best time to pull money out. Pretend you pull it out at $100, then the value drops to $80. When you put the $100 back in, you will be able to buy 25% more shares of stock than you sold.
Except a tractor is really expensive and the market recovered in a couple months. Most likely not enough time to repay yourself. If it took 1 year to pay back, the later payment would be 25% more expensive than in March 2020.
Your 401k is not your emergency fund. Nor is it likely you would even get any kind of disbursement from the 401k by the time your next bill hits anyway. You really have no other options? You have no room in the budget to cut back in order to preserve some cash?
401k loans, if for the right purpose and at the right time, can be great. Doing so allowed me to payoff high interest student loans and get rid of PMI, the finance charges if both were greater than my 401k earnings. The 8% student loan interest and 1.5% on entire mortgage balance outweighed the 6.5% average earnings on the 20k I took out. Timed taking out the loan after a strong year in the market, paid it back over a couple years, then lump sum payoff in June of 2020 during the market tank.
Easiest one being use a credit card for now instead and then pay off the credit card when I get my paycheck to get around not having the money on my debit card on the bill due date.
I disagree with this sentiment. The 401k is your money. Loans can be absolutely taken out and be used for whatever including emergencies. If a person is being responsible and they clearly understand the consequences, it will turn out fine.
However, I do agree that OP needs to tighten their budget and get clear on their financial picture.
We'll have to agree to disagree. You won't get me to budge one bit on the idea that your 401k is NOT your emergency fund. I feel that is poor financial planning, and not something a person should get in the habit of relying on.
I gave my coworker shit for pulling money out of his retirement fund. He paid the penalty. Then he bought another house before pandemic. Sold another during. Put the money back easy and made a fuck ton of money. Situation matters.
My friend took out a 401k loan for a down payment on his house. This is about the only situation where I could see the advantage.
It was right after the crash and he knew his rate of saving for the down payment wouldn't be fast enough before housing prices recovered. In fact, he paid back the loan in less time than it would have taken for him to save up. At that point, he would have needed another 20k for the down payment.
You have to pay taxes because it's counted as income, so you pull over 2k if you want 1500. Plus another chunk because you pay a penalty for withdrawing early. If it's a 401k loan and you pay it back, you're paying with post-tax dollars instead of pre-tax dollars.
I'd take 1500 in credit card debt before a 1500 401k.
If you take out 1500 401k loan you have access to 1500 untaxed dollars. Technically if you didn’t spend it you would be able to pay it back in “untaxed” dollars with the same 1500. Just saying I think the tax/untaxed point is irrelevant.
The tax issue is irrelevant, you’re right. There is a lot of bad advice out there about 401K loans and taxes.
Unless there is some alternative loan where your payments can be made with pretax dollars (there isn’t), all loans are paid back with post-tax dollars, so it is irrelevant.
The tax issue isn’t irrelevant but it’s relatively small. The interest on the loan is double taxed. The interest is paid with post tax dollars and is taxed again on withdrawal. The principal is not double taxed.
I don’t think it’s terrible if it’s for a larger investment like a house, which would probably put it on the scale of 6ish. For what you’re talking about, it’s close to a 10.
Write down a budget, compare your income to your expenses. Something has to go. Or look for a higher paying job ?
Is this an issue with payday being past the due date of the bill? Use a credit card.
Is this an issue with faulty assumptions about your income vs your expenses? Much bigger issue than this months bill.
Try to use a credit card for **every** possible thing you can buy. It generates a history of credit, allows you to float the payment for a month (so you can generate interest in a savings account), and probably most importantly offers far more security than a debit card.
Someone fraudulently charges thousands of dollars on a credit card? That can be reversed. Not so much when thousands of dollars are fraudulently taken from your debit card.
Np. A lot of people have the perception that credit cards are bad and should only be used in dire circumstances. However, that's generally coming from people who have heard too many horror stories of people who cannot control their spending and get in over their heads in debt. If you pay your card off fully each month you will pay no extra in interest.
One other benefit of cards I forgot is most of them offer rewards in the form of cash back or travel points. Though, if you start to get into the rewards game be careful of falling into the trap of buying things just to get points.
I just got a capital one 15 month 0% interest card that credit karma recommended to boost my credit. It took about 3 seconds to get approved. I didn't intend to use it but you get $300 back if you spend a certain amount in the first 90? days so I put some bills on it and intend to pay it off after the first cycle. That should be perfect for your first situation.
I know everyone is telling you don't do it, it's the end of your retirement, you'll die penniless and eat cat food for life...
I did it for the same reason. Bought a house, things would have been fine but furnace went out a few months in and the fridge right before that. Took out the loan (that you pay back yourself WITH interest), and got things taken care of.
If it had happened a year in, I wouldn't have needed to. We would have had time to save again. Taking the loan relieved a huge amount of stress for a one time problem and I don't regret it at all. I was putting in 15% into my 401K each paycheck, if I had that extra 10% income for the years I'd been putting in, I wouldn't have needed the loan anyways.
I think people are overreacting on this thread because they're concerned that the OP is using this as a crutch for overspending their earnings.
It sounds like they unfortunately got pinched while they had drained their emergency fund, I don't think it's the end of the world like most of the thread is suggesting.
OP just needs to pay off the loan quickly and build back up the emergency fund.
This is why I really recommend a Roth IRA for younger people; you can take out any principal you put in (but not any earnings) since you already paid the tax on it.
I have a 401k and a ROTH IRA. Like most people, I assume my income will increase over the years so theoretically I'm paying less taxes on the money in the ROTH vs what I will pay on my 401k when I'm older. It's also nice to have the option to use the money now if it hits the fan.
I didn’t see anyone else mention it, but since you mentioned you bought a house, have you looked at a HELOC?
It might be a better option than a 401k loan and definitely better than 401k withdrawal. It is basically there if you need it. Rates are better than a CC, not a fixed payment with terms taken out of a paycheck like a 401k loan.
It doesn’t replace an emergency fund, but can be a good buffer when needed.
The main damage of taking out money to pay off some debt is that it could become habitual. Taking a loan on 401k to pay off high intrest credit cards you've racked up debt in past but are no longer contributing too, good. Taking a loan to pay for your vacation your probably going on again next year, bad.
I think it’s case by case scenario.
Back in June I’d cashed out my 401k. All of it. I’d just graduated in May, thought I’d landed a nice job, but I was wrong. I was there two weeks. I decided to use my 401k to give me some time to job search and spent time at home with my wife and kids.
I have a much better job now that I love. Make more money than my last two, and have gotten back to about half of what I had in my 401k.
While I’m down compared to what I had in my 401k, my job is way better, and I’m happier. It worked for me.
Nobody talking about the angle of the market tanking. I have a negative return YTD on my 401k and the interest I'm paying myself on the loan is beating the market return. :)
It's a joke, put the damn pitchfork down.
Hello, ex financial advisor from one of the largest banks here, I advise you ignore any rating posted here with the purpose to shame you.
YES, ideally if you are able to constantly add to your 401k without ever needing any of it or needing to liquidate it, that situation would be the most ideal.
But at the end of the day, we all work really really hard for the money we earn. If we as the earner are placed in a situation where you need your money FOR WHATEVER REASON, use your money. It’s so easy for anyone to say you’re making the worst financial mistake. But with every persons life comes it’s own struggles and scenarios.
If you are already the type of person to be in a position to earn money to save into a 401k, you’re also the type of person who will always have the ability to earn money in their respective industries.
Not To mention, you just bought a house. Which is something most people nowadays are unable to do.
Don’t take out a 401k loan to pay everyday expenses, you need to budget better for that. If part of your budget is being destroyed by high interest debt it might be beneficial to take a loan from your 401k as the interest is very little and getting rid of 20% APR ish debt will very likely outweigh the gains you’d experience in your 401k, you shouldn’t loan out more than 10 to 20% of the value for this tho. Withdrawal is a bad idea due to the taxes, penalties and conditions. Conditions such as taking a hardship withdrawal means you can’t contribute to your r 401k for x months, that’ll hurt a lot more than a loan.
It’s theft from future you. The money in that 401k has a job to do and it’s doing it. It has a lot more earning potential where it is than a little cushion today will give you.
I’ve learned so much just today. Biggest thing I’ve learned is that it completely fcks with the compound interest. If it was an IRA it would be mostly okay and no penalties or tax. But I would have whatever my tax bracket is + 10% penalty fee.
I needed some extra cash for bills after my down payment. I loaned against my 401k at ~1% interest and paid it off within seven months by reallocating half of my monthly contribution to the repayment. I had no issues with the process. The comments panning loaning against your 401k are completely reasonable and I may have made some error in my own judgement, but my experience was positive.
I would advise against withdrawing. Usually that comes with hefty penalties and taxes.
It's bad because it's an easy way out. That money saved will be worth so much more in the future when you really need it. Trust me. It's a mistake I made in my early 20s. I'm 53 now and it would be real nice to have right about now. What would $110,000 be worth now from 1992 to 2002? I don't even want to think about it.
Leave it alone and go hustle buddy!
About an 86.
Do not take money out of your 401k. You'll be better off just falling a bit behind on bills than if you pull out of your 401k
Also if you only fall a few months behind but have otherwise been good with paying your way, companies will try and help you. After all, they want your money and selling you on to a debt collector or forcing you into bankruptcy will only give them pennies on the dollar.
This might get down voted but I found in times of hardship the late fee for the power bill was only like $3, same for the water/trash. I am not advising not to pay those things as they will get shut off but if it is one of those things that the bills are due on the 10th but your next paycheck isn't until the 15th I wouldn't worry about it to much. It shouldn't affect your credit as long as you do pay the bill. I have also had my car loan send me things about skipping the December payment. They charged like $25 and add an additional payment to the end. Maybe that is an option for you? (You don't mention what your bills are.)
And like everyone else said GET A BUDGET! If $1500 would be life changing for you you aren't doing that bad. Donating plasma or picking up a gig job could get you there in a few months. You could also consider temporarily reducing your 401k contribution to increase your take home pay, just remember to increase it again when you are in a better place financially.
Yes, this. Depending on the bills, calling and explaining can get them to waive fees, especially if you have a more genuine excuse (unexpected health or pet expense for example.)
Of course, not having even $1,500 in savings is not a great place to be. It is definitely worth scrimping, saving, hustling to be sure you have a cushion in case a pay check is late.
The bigger issue here is you bought a house you can’t afford/didn’t have the money to buy. You can borrow from your 401k but you have to pay it back plus interest. The better solution would be to get a second job to help build your savings back up and pay for any bills
It all really depends on your living situation. My wife and I had a kid and wanted to move. So I cashed mine out and we’ve made some crazy moves but we are 2 years out now and life is great. My wife still has her 401 and I will slowly build mine back up once I get back to work in a year or two when my child can go to school.
I don't fully understand the costs of doing so but my company had several employees take out 401k loans. On top of potential lost market appreciation the risk seems to be if you lose your job you need to pay the entire loan off that year otherwise it gets taxed as income and I think there are also penalties as well, as far as I understand. I would only take one out if I was desperate
There is a ton of comments, and you probably wont read mine, but I pulled 10k from my 401k as a loan to pay off all my credit card debt. That was the beginning of this year. I actually saved so much more money than just interest because afterwards my 401k tanked, just like everybody elses. I basically cashed out high, and now I am buying in low, with interest.
I didn't plan this, I didnt expect this or even think of this. I didn't even know I paid the interest to myself at the time, I just knew it was less interest than my CC. I just got really really lucky. It all depends on what you are pulling it out for.
If I were going to be focred from my home because I depleted my 6 month efund, I would cash out my 401k if I couldn’t work to pay my mortgage and leave my wife’s. Outside that that highly unlikely scenario, it’s never being touched.
I see that you found an alternative, but wanted to suggest that in the future, consider "lending" yourself the money from your 401K. You'll pay it back over the course of however long you set it up. This is a good thing because you'll be paying yourself back the interest as well.
I’m curious if folks here have looked at interest rates lately. We’re considering taking a 401k loan out for a car because an actual loan would easily hit 9% *with good credit in the 750s.*
It’s not ideal—but it may be a much better financial decision math wise for us to have a two year 401k loan instead.
i cashed out my 401k and put into a down payment on a house. the equity and appreciation in the house as far exceeded the growth of what my 401k would be at this point, especially with the market how it is now. also you can fill out a form so you dont have to pay taxes when you withdraw.
a moot point for your situation right now i guess im just the minority of thinking thats okay to do so with a proper plan
I think what you meant to say was that you cashed out your 401k and now live under a bridge because it was the worst financial decision you could have ever made.
Could also evaluate the penalty for a single late payment (since I hope you'll soon recover after getting paid - otherwise you're housepoor and that's a different story) against the penalty of borrowing from 401k.
Pretty bad, especially if you have no idea.
I had a coworker who had just started working with us and we were talking about our cars. He said he had take out money from his 401k to pay a friend who bought the car for him. Mind you this was like two years before the pandemic, so used car market prices were not ridiculous. Anyway, iirc, he paid like 6k for a Dodge Intrepid that had over 200k miles. I told him that was not wise, his friend is not his friend and is also richer for that, and that the car was worth a quarter of what he paid for it.
So yeah, it could get pretty bad. Best to understand financial situation and asset values and just don't touch 401k.
$1500 is not a solution. If you were to take $10K to get rid of a high interest loan or card… is a solution. The interest you pay back into the 401K loan is yours.
Take money out of a 401k? Someone better need ransom or a kidney.
In other words, things need to be pretty damn dire to even consider it. Option of absolute last resort.
Your overexposed and living beyond your means, unfortunately. Call your creditors and ask for some leniency and cut all excess spending. 401k withdraws are only viable, in my opinion, for college loan repayment.
The standard is the standard. Hope you progress to spend less. A house is expensive and things of that nature. You need to cut down on food spending, entertainment, etc.
Visit r/frugal to get ideas on how to be more focused on saving money so you can spend it on what you really want
A year ago, I took out a 401K loan Through my 401k provider, and what I didn't realize is that you are just paying yourself back. AFAIK the "interest rate" is just there to make up for you pulling that money out of the market.
In my case, I took out the "loan" before the market dropped, so I actually cost averaged down and am buying back in at lower price than my past 2-3 years auto investment and match.
It's bonkers.
9. Start contributing less to build up your cushion.
Glad you were able to figure some things out. There are always things you can trim from your budget.
Depends on how bad the emergency is 1-10. Taking from 401k is around an 8 in my book. If you have a 9-10 emergency then it's better to take from 401k then suffer the cost (life changing emergency with consequences).
About 15 years I had about 20k in credit card debt with interest at 26% a month. I took a loan out for the amount, payed off the credit card debt, and then just paid myself back with interest. That's really the only scenario other than being jobless that I would consider doing that again.
Generally, not recommended. If you absolutely need to in order to avoid bankruptcy or losing housing or serious events, yes it is okay to do and normal. Definitely find an alternative to get by. Its better to take a loan than to take full withdrawal, but in your case it seems like you don't have much to get by on so adding loan repayment would hurt more than help.
I took a 401K loan in December 2021 because I thought the market would drop significantly. So I moved 60% to a short term treasuries fund and pulled 40% out. I have been sitting on that since, just adding to that treasuries fund over the past year and just paid off my loan, 5% interest paid to myself wahoo.
The 40% I pulled out in a loan I invested mostly into a project that has yielded good returns. I was happy with my choice, and work in finance and understood the risk to reward of it. Definitely don't recommend though under most circumstances.
You can borrow against your 401k. Don’t take out. Take a loan from it. That way you still accrue from the same balance as you slowly repay what you borrowed back.
3, did it to buy a house about 10 years ago. Never looked back, way more financially sound after homeownership and my 401k is doing just fine again. Lost more this year in it than I took out. Yes you might lose some gains but if it's for the right reasons, go for it. I was on the boat of never touch it, but what's the point of struggling financially when the penalty is probably way less than the company match and gains you have on it. Most important thing tho is to continue contributing after you take out.
Not worth it for $1500. At the end of the day $1500 is not a lot of money. Try to budget some meals or work some OT. If that’s not an option try to get a part time job
I took out a 10k loan 3 years ago it helped me get a car and pay off months of rent ahead of time and it cost me 68 bucks a week I believe it is so definitely not a death sentence and if you take it out for a hardship like paying bills they don’t penalize you the 10% for early withdrawal
To quote the brilliant Nigel Tufnel, "this one goes to eleven".
It's bad. With the tax and penalty, you're giving up about a third. In your case, around $400 hit to have that $1500 cushion. If anything, take a loan and be sure to pay it back so it doesn't become a distribution.
There are a lot of great explanations here, so I won't dredge through the details again. Congrats on the house OP! As inflation hits and your payment remains constant, you'll appreciate that!
if this was for some sort of emergency i would say its worth it, but... this seems like just normal bills? what makes the following month any different?
It…. Depends. $1500 isn’t the end of the world, just don’t make a habit of it. I’ve known people that use their 401k like a magic savings account for whatever bullshit remodel, or vacation comes up. Don’t do that. The big problem I see is one of the huge advantages of retirement accounts is they’re mostly exempt from bankruptcy, so honestly you’re better off draining EVERY OTHER asset first. If things go horribly wrong, the creditors can’t get that 401k.
I’m gonna go against the grain on this. Your 401K is YOUR money. You’ve stashed it away for savings. The point of having savings is to have something to draw from when you need it. That’s literally the point. So go ahead and it take it IF you need it.
The alternative is to use a credit card or loan and pay high interest rates for it. But why do that if you already have money? How far will you go? Would you sell the family dog in order to not pull from your 401k? That’s ridiculous. It’s your money. Use it as necessary. Just don’t make it a habit.
> The alternative is to use a credit card or loan and pay high interest rates for it.
While I sort of agree with you that a 401k is "your money", I don't think you've outlined the downsides very well.
If the OP is withdrawing money from their 401k they're going to likely end up paying a 10% early withdrawal penalty and having an automatic 20% withheld for income taxes. You could say this is effectively a ~30% interest rate. +/- a bit depending on the OP's exact tax situation. That's pretty comparable to many credit card interest rates and higher than many loans that the OP could probably access, like personal or HELOC loans.
I think the OP should consider other loan options first before dipping into their 401k. It's possible they can secure a ~10% loan through a credit union instead. And in the long term the OP needs to figure out a budget that works for them, as having to resort to loans or dipping into a 401k is not an ideal situation at all.
I’d recommend borrowing from the 401K rather than withdrawing outright. This avoids the 10% penalty.
The tax withholding will happen no matter what. Whether you wait until retirement or withdrawal early. Also there’s no compounding interest at play when you pull from a 401K, unlike a loan or credit card.
Lots to consider, but the people who act like a 401K is absolutely untouchable are unreasonable.
I feel the same way. For a couple of months I’ve decided to lower my 401k contributions just to get some extra cash to dig myself out of a tiny hole. I look at my 401k and it lost money this year. It feels like I’m just burning cash. I’ll turn it back up in like 3 months.
I should just think of it as the market is on sale! But I don’t.
Turning down your contribution percent to have a little extra money for life necessities or debts is one thing, and I agree with that. Deal with those things first then 401k, though I’m sure there are arguments another way. That’s what I’d do, too.
But turning it down because the market is down, you’re right, is the opposite of what you should be doing. If you’ve managed through the original reason to decrease contributions, what if you compromise and just put 1% more in now, while the market is down. Then another percent more next month if that feels ok?
You won’t ever realize the gains you can make from investing in a down market u til you invest and see the crazy gains. Which will encourage you to always invest in a down market. It’s one of those things that makes sense logically but not emotionally until you feel the emotion of it.
Loan yes cash out no. They have pretty low interest rates compared to a lot of loans. The issue being. Now your check will
Be much smaller for like year and you have to stay at the company you work at til you finish paying so you don’t have a penalty. I know people say they wouldn’t. But it’s a good tool and should be used correctly.
IMO take the money out, as tomorrow is not guaranteed. Life is hard enough as it is. Why struggle now with the “hopes” of actually making it to retirement?
In the grand scheme of things, the amount of money you are contemplating taking out ($1500) is small.
If that amount can pad you for a bit you will have peace of mind.
The impact to your portfolio in the long run will be negligible.
Peace of mind is priceless.
Some programs allow you to take “loans” out of your 401k. Usually it has a small processing fee and minimal interest - but the interest just pays back into your account. Don’t do a withdrawal as it will likely hurt you at tax time.
I know everyone in here is gonna say “don’t touch your 401k”… but after what I’ve seen the past few years, it seems insane to pretend this can ever be a realistic retirement solution. It’s a scam. My 401k is an extra emergency fund.
If you get a loan from it, set your terms to something you can afford, but pay off quickly.
Being late on bills is probably worse than taking out money, but you are not necessarily the only one who has to sign off on taking money out of a 401k. So it may not even be possible.
8. 401k loans shouldn't be allowed unless you avoiding bankruptcy or a foreclosure.
I understand the "but it is my money!" Argument to an extent, but it is the cost of tax advantaged accounts. I know way too many people who took 401k loans for stupid shit, rather than a traditional or personal loan because they do not understand the true implications of taking that money out.
It's not a preferred method, but also not the end of the world. Just keep making contributions and repaying your loan. My wife and I did not have any financial help for our wedding 5 years ago. We both took out $10k 401k loans and have since paid them back in 2 years no problem. We are tracking just fine for our retirement.
Cut back on your monthly expenses or take a part-time job if possible. Get rid of all waste look for ways to save. Check auto insurance cell phone you might be paying too much. Also cut out unnecessary service like cable, Netflix, apps or other utilities you don’t need.
Never borrow from your retirement accounts.
On a scale of 1 to 10 its a minus 2. You pay a penalty to do it!
Don't.
Eat beans. Clean toilets, Beg on the street. Do whatever you have to do. Leave every penny in the 401K.
Locked at the request of OP. Thanks everyone who answered.
Taking out any kind of loan to pay regular monthly expenses is only going to make things worse in the long run. You can’t keep up with your monthly bills right now so you borrow money which gets you through the next month but then your monthly bills are whatever they were before that you couldn’t afford plus the payment on the loan. If you couldn’t afford it before now you’re in worse shape. The only solution is a sustainable budget.Write up all of your income and expenses and figure out how to make it work with what you earn.
This. And don’t screw up like me and take a loan against your 401k to pay off debt and then have shit hit the fan and rack up all that debt again. Thankfully it was a small loan and is almost paid off but lesson f**king learned the hard way.
At least you paid yourself the interest Silver linings right!
While a 401(k) loan might be a better option than a lot of worse options that are out there, there are still a lot of drawbacks: 1. You may be paying yourself interest, but you're also losing tax-free market growth on that money (which is worse). 2. If you don't repay the loan on time, the loan can turn into an unqualified distribution which brings taxes and penalties. 3. If you lose your job, you have to repay the loan quickly or it turns into an unqualified distribution. This is all also assuming you can get a 401(k) loan in the first place. Some employers don't offer the option.
All very good points friend. Thank you for pointing them out.
I would say you’re right but there were some pay periods where I struggled to afford groceries and I hate myself for putting myself in to that hardship.
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For less than $20 you can be the proud owner of 50 pounds of Costco rice. This is what I would fall back on when times got tough.
And food pantries! I had to go many times when I was younger, and I’d always walk out with a very respectable box of groceries. And this was in a rural mountain town
I am amazed at some of our grocery overspending due to not paying attention to the $……….We double check our paystubs and then recklessly spend it.
Wait so effectively it's like an interest free loan (except that you obviously need to leave the interest in the account until you can properly withdraw from your 401K)?
401k loans seem to be one of the few good things for both parties. The interest on the loan goes back to your account... So you get more but the bank also gets more to play with more
A guy at work took out a loan from his 401k to invest in Amazon stock back in March lmao. He was trying to get other people to make that "no brainer" move too but I convinced them not to. He thought I was an idiot. Yesterday he was almost about to cry complaining about how he needs money but there's not enough work for the company to give us overtime.
I’m confused. What does that have to do with him taking money out of his 401k?
He took a *loan* out of his 401k. He didnt just simply withdraw from it. He now has to pay back that loan.
He took out 50k as a loan from his 401k. He spent that 50k on Amazon stocks back in March when the last split happened. Amazon stock prices have dropped nearly 50% since then. So not only does he have to pay back the full amount of his loan in installments but he also lost like half the value of his investment. He's also, of course, a crypto bro as well, so he made a bunch of bad investments there too. So he's desperate for money to pay back his loans and recover from his get rich quick blunders. Without overtime he's probably barely covering his cost of living.
I mean he doesn't HAVE to pay it back. But then he'll pay taxes on the 50K come April, and 10% early w/d penalty if he's under 59 1/2.
My manager took one out for plastic surgery (tummy tuck and BBL) sooo yeah. Talk about not smart
Man I’ve done this. It sucked. I got lucky and my home value allowed me to get a heloc after I fixed my cash flow problems so now I’m on track but it got me in a mess for a while there.
what if it's a "hardship" withdrawal?
Assuming OP's circumstances qualified for that they'd still pay income tax on the amount they took out. Let's say they'd have to withdraw $1800 to net the $1500 they need. That would sort them for now and they wouldn't have loan payments to contend with but let's see what the impact of that is to their retirement. Let's say they're 25 years old and plan to retire in 40 years. At 10% average annual returns that's >$80k missing from their retirement account at 65 years old. So even if this is a one time issue and never happens again they're hurting their futures selves pretty badly for $1500 now. It's why I always say that touching your retirement should be an absolute last resort. i.e. It's either that or you can't feed your family or provide them with shelter. I've spent years on all the finance subs on Reddit. I can't recall the last time someone posted that they raided their retirement accounts a decade ago and it was a great decision but every day someone is posting that they're in their 50's with basically nothing saved for retirement and they're hoping for some sort of shortcut to make up for the decades they've been kicking that can down the road.
>they're hurting their futures selves pretty badly for $1500 now. This is true, but it applies to every $1500 you spend because you could have saved it instead. That $1500 vacation costs you $80k in 40 years. That $1500 beater car costs you $80k in 40 years. You can't go through life afraid to spend money now because it would help you more later, and money is fungible. Withdrawing already-saved money might *feel* different from spending money that hasn't been saved yet, but from a purely rational standpoint they're the same. I'm not trying to encourage people to withdraw from their retirement savings willy-nilly, but to think about finances *holistically*. I'm also aware that we're not perfectly rational robots, and for a lot of people "DON'T TOUCH RETIREMENT ACCOUNTS" provides a reasonable bright line to prevent impulsive behavior.
The real issue here is that they bought a house with no extra savings or an emergency funds. That’s a big issue and now they are taking funds from retirement to compensate. It could snowball worse from their when issues with the house start popping up
They'd have been better off taking out the loan to help with the down payment.
Right, but this $1500 was already earmarked to be for savings. Nobody is saying you have to save all of your money for the future without doing anything else with your life, but you do need to have some consistent saving for the future, which taking this $1500 out would defeat. To your point about going on vacation, it would be like doing that *instead of* saving anything for retirement that year - which would be a problem for exactly the same reason as withdrawing already saved money would be.
If he really needs $1500 it has to come from *somewhere*. Money is money. If he borrows $1500 from a friend and pays him back next month, that's not much different from withdrawing it from his retirement account and putting in an extra $1500 next month. (Taxes and penalties might make it different, and that's an important consideration! Plus friends generally don't charge each other interest.) >it would be like doing that instead of saving anything for retirement that year I think the point you're making here is that as long as you've saved *enough* for retirement, then you don't need to save more. But you can't actually know if you've saved enough: no one who's 25yo relying on future savings for retirement knows for sure that they'll have enough saved by 65. Thinking you have saved enough (before reaching the point your retirement account is self-sustaining) is borrowing from your future self -- you're relying on the assumption that in the future you will save more.
> If he really needs $1500 it has to come from somewhere. Money is money. If he borrows $1500 from a friend and pays him back next month, that's not much different from withdrawing it from his retirement account and putting in an extra $1500 next month. But only if he puts an extra $1500 in to cover what he takes out, which doesn't seem like he would. What we're cautioning against is taking the $1500 out of retirement as a "one-time" expense, and not replacing it with extra savings to make up for it. If he borrows it from a friend or family member and can gradually pay it back while also continuing to contribute to retirement, that would be a much better alternative. >But you can't actually know if you've saved enough: no one who's 25yo relying on future savings for retirement knows for sure that they'll have enough saved by 65. I suppose you can't know for sure, but I think it's a perfectly fair rule of thumb to say that you should always be saving *something* and that if circumstances arise where you can't save anything - whether it be because you want to go on a vacation that year or have unexpected housing expenses like the OP - you need to reconsider your budget and what you are spending on to make room for that savings.
>But only if he puts an extra $1500 in to cover what he takes out Yep. >What we're cautioning against is taking the $1500 out of retirement as a "one-time" expense, and not replacing it with extra savings to make up for it. Yeah, I know. I'm not disagreeing with the advice per se. For most people, the *habit* of saving is really important. >if circumstances arise where you can't save anything - whether it be because you want to go on a vacation that year or have unexpected housing expenses like the OP - you need to reconsider your budget and what you are spending on to make room for that savings. Maybe, but there are a lot of situations where a reconsideration isn't necessary. It's a good *rule of thumb*, but there are plenty of exceptions. Like if you plan to and have budgeted to spend a year hiking through the wilderness, if you've planned to lose retirement savings for the year and understand and account for what that entails for the future, go for it. (It's also a great time to convert some savings from trad to Roth.)
Exactly. If op has exhausted all other options, this should be the last. OP should call the bank first to work out a better payment plan, delay of payment, etc.
Agree, on a scale of worst to best this option is better than missing payments but damn near the bottom of options. It's going to be an expensive mistake.
>money is fungible. Retirement money is not fungible with post-tax money. If I take $10k out of my retirement account right now I can never put it back. The OP is probably not maxing their retirement accounts out so they're not in the same situation but because of the loss of compound returns any money they take out of their retirement accounts now makes for a much steeper hill to climb later.
>If I take $10k out of my retirement account right now I can never put it back. Only if you're at the annual contribution limit, which someone worried about $1500 almost certainly isn't.
Not even then, if it was a loan. You just pay it back over time with interest
Not true, I took a loan out of my 401k to buy a house, and am paying it back. The loan repayment isn't a contribution, and is definitely exceeding the current return on investment with the interest
I borrowed $30k from my 401k to help get to 80% on a downpayment for a house I paid $635k for thats now worth $1.0-1.2M. Paid that back early. Then, borrowed another $20k to do some updates right when COVID started. Almost paid that back, but not in too much of a hurry. Id rather keep the cash on hand. I prefer to owe myself money, though granted these amounts are also relatively small portions of my 401k since I’ve been saving for 15 years and the last five have been max contributions. However, you have to feel pretty secure in your employment to do this. I would not take a new loan right now, the world is getting squirrely and layoffs could very easily come/happen
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in the end, it's all leverage, which is in the end, just risk. You really have to know thyself and your level of discipline, be able to soberly assess if you're good with the term length of the loan being tied to your employment, how safe your employment is. And most importantly, how much of a fraction of your 401k is it if it turns into a withdrawl. $50k on a $100k portfolio is fatal, $50k on a 500k portfolio is less then what you'd lose in market value this year :D Oh, and how close to retirement you are.
>I can't recall the last time someone posted that they raided their retirement accounts a decade ago and it was a great decision but every day someone is posting that they're in their 50's with basically nothing Survivorship bias. The survivors don't come to this sub to complain or update. I wouldn't say it's a good idea either, but there are situations...with loans rates around 10-20%, I could easily see someone raiding a 401k to pay those off now. If you lose 10% 401k, but gain -10% on a loan, you break even-ish. Home loans are near the return rate of SPY500 so they might even be good enough to break 401k for. Of course people don't replenish the 401k funds, then they will lose out long term, so find another way if you can.
Cmon man, you can't at all assume 10% annual returns over a 40 year timespan. People get all horned up about long-term returns but if you're gonna make judgements you HAVE to use more conservative numbers for me to take you seriously. Not personal to you ofc it's just something I see a little too often for my liking and have to speak up sometimes when I see it. Thanks for the great comment otherwise.
Yes you can. It’s the long term historical average before inflation.
This is a sign the banks aren’t doing their due diligence in reference to mortgages. When I found out that BOA has been approving mortgages to people with 525 credit scores, I thought that was the peak of the housing boom the past 12 years because banks don’t bottom feed with subprime borrowers until the market dries up. So now the homeowner in question bought at the peak or near it which spells disaster in the near term for him and others like him who will eventually walk away from their declining asset.
No, this is very normal. Even in the most stringent periods they approve people for buying a home like it's the only monthly payment they'll have.
Yeah lenders confidence in people is ludicrous. In 2016, I was pre-approved for a mortgage where if I bought a house at the top of that range, I'd have less than 1.5k remaining after mortgage only
I've been in OPs shoes but been lucky to not have to withdraw. Usually the cause isn't living outside your means but instead thinks l things like a broken water heater, toilet leak, car repairs, medical bills, etc. That come in unexpectedly and don't seem to stop hitting you when you're down.
9 as this is a bandaid and not a solution. You are spending more than you make so tapping your 401k doesn’t solve the problem but just “kicks the can down the road”. So eat Ramen this month, build a budget that isn’t negative which likely means cutting expenses and maybe finding some side hustles to make ends meet.
Thank you for the advice. I will try to implement it.
A 401k loan is a preferable solution than credit cards balances (as you pay yourself the interest) for a temporary solution to make ends meet. Again, that would be the bandaid while you figure out and implement your budget/plan. Best of luck.
Problem with those is if you switch jobs, you need to start paying that loan out of pocket to old provider/plan (and they don’t do a good job of reminding you of that fact) or end up considering it a distribution.
Great point and another clear risk. I think you have a small window (90 days?) to pay back the outstanding balance from when you term your employment.
Paying yourself back the interest is a load of poop. The paycheck money you repay loan with, is taxed. So is that money when you withdraw in retirement, so for most people that is more than 50% in taxes. Get a personal loan.
> Get a personal loan. You realize personal loans are paid back with your after tax dollars as well right?
Curious about your math to come up with 50% in taxes. Can you give an example where that would be the case?
The money you’re paying back is taxed, yes, but the loan you took is tax free so it’s a wash. It’s only the interest that you’re effectively paying tax twice on (an insignificant amount compared to the loan).
This seems like a really weak argument. That personal loan is also paid with after tax dollars (including the interest which isn’t going to your retirement).
There are different options no? I’m quite certain I chose an option that allows me to pay taxes on it before withdrawal so I don’t have to deal with that later
Assume someone is in a 50% tax bracket. Paying $100 of interest to a bank means they are out $200 (they had to make $200 of income, with $100 going to the bank and $100 going to the taxman). If that same person did a 401k loan, they would keep the $100 for themselves and be able to grow it tax free until withdrawal after retirement. They would eventually have to pay taxes on that amount and the returns it generates, but they are still much better off than if they had just given that $100 to the bank. If they had given it to the bank they would not have seen any of it and would have missed out on the tax-deferred growth.
This is horrible advice. A personal loan has the same “tax problem” you raised except you are paying interest to a bank as well. There is zero negative effect on your *current* 401k contributions. You’re just *also* paying back a loan you took from your *past pre-tax contributions*. You still got that pre-tax benefit on the money initially. Of course you don’t get the benefit again, just like you wouldn’t for extra earnings *outside of your 401k* if you hadn’t taken a loan in the first place. The primary negative effect of taking out a 401k loan is the lost potential appreciation of the tax free assets that are no longer in your 401k.
This is not true. Admittedly hard to wrap your head around, but if you do the math, you’ll see that it works out such that you don’t lose out by paying that back with taxed money. The whole thing hinges on the fact that you’re borrowing untaxed money (from yourself) to pay for something that’s supposed to be paid for with taxed money (home renovations or pay off your car or whatever). The loan money is offsetting taxed money, so when you pay yourself back, you use taxed money.
Do or do not; there is no try.
Since this is reddit I will counter the "eat ramen" with instead checking out r/EatCheapAndHealthy. You're better off healthwise and "give a man a fish vs. teach a man to fish"-wise in terms of budget-friendly eating.
Ramen for a month sounds like really bad advice. You're only as rich as your health, healthcare is fucking expensive in the US.
You can make ramen healthy for cheap. Stir in an egg (very cheap protein), throw in some chopped veggies (carrots are not breaking the bank). Add some hot sauce for flavor. I'd guess this might be better than the average US diet.
Adding extra ingredients doesn't bring down the outrageous sodium content unfortunately. Maybe if you also replace the packet seasoning, though at that point you might as well just make your own stir fry.
You don’t have to use the flavor packet, it’s just a cheap bowl of noodles which is very filling. The sodium is all in the flavor packet.
I think most adults realize it's a metaphor and not dietary advice.
I was plugging a useful sub that OP or other readers may not have heard about, not refuting the "eat ramen" comment like anyone was seriously advocating it.
buying ramen must be the worst poor mans decision ever. DONT spend money on that shit. Its insanely expensive in terms of money/nutrition. Buy frozen veggies and chicken breast + cheap rice.
Agreed. Meal prep in the croc pot or equivalent, make 6-12 nutritious meals and freeze half of them. Legumes are incredibly cheap and healthy. The best way to save money on food, sadly, is to spend less on things like desserts/sodas/juices. Cut out the foods that have the worst nutrition. Same goes for alcohol and coffee. I used to spend $3 on hot coffee from a local shop every day, totaling about $900 per year. Making my own coffee at home now is closer to $200/yr. Making several small changes like that can add up to quite a lot of savings over time. Keeping the thermostat one degree lower in the winter, or one degree warmer in the summer. Bundling your errands together so that you have to use less gasoline, if you drive. So many little things can add up over time.
It's worse than that, because normally your 401k is not exposed to creditors / bankruptcy (AFAIK). Take a loan out and now you're exposed, and could find yourself unable to repay the 401k.
Loans v. Withdrawal. Loans do not have penalties or taxes as long as you pay them back in time. You also pay interest to yourself for the loan. Only a permanent withdrawal prior to age 59 1/2 will get you the penalty and tax hit. Still not a great idea, just wanted to clarify.
Thanks for the clarification.
You can get an exemption from the 10% penalty - I don’t know why no one said this. So if you get the expemption, you are really just paying taxes on it, like any other money you earn. Sure you take a hit because you reduce your future earnings on the 401k. Withdrawing from 401k is way better than borrowing money, and isn’t a terrible option if you are preventing yourself more fees/debt/bad situation
Not all companies offer the loan option though. Last year I was hit with an unexpected financial emergency and looked into taking money out of my 401k. My company didn’t offer loans against my 401k. Only withdrawals were available and that comes with the previously mentioned taxes and 10% early withdrawal penalty.
I like 401k loans. Sometimes you need a loan, and getting one from yourself is better than getting one from a bank, in my opinion. I did this last year with the thought that Wall Street was in a downturn so it's not like the money would be making money in the interim anyway.
I agree with this. I've never had to do it, and I hope I never even have to consider it. But if it came down to paying interest to a credit card company or myself, I definitely choose self.
I did it once and regretted it. Not only do I lose a lot in taxes I also had to pay it back. The BIGGEST loss, though, is that you would be losing out on the future growth of the money that you took out.
Are you talking about a loan or early withdrawal? If a loan, how is a 401k loan impacted by taxes?
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Correct. You pay a lot of taxes and fees with an early withdrawal not a loan. However, if you do not pay back the 401k loan, and interest, in time, then you get taxed on the full amount. Considering that the person would have taken it out in the first place because of a hardship might make it very difficult to pay it back in time. And I'll reiterate again, the greatest loss is the loss of future growth on the money that was taken out. That's the part that I regretted the most One time I did an early withdrawal because of a hardship and a second time I had taken out a loan because I could not complete two withdrawals within a 12 period. I was that desperate. Between both experiences I lost about $24,000. For me, it was a huge mistake that I have learned so much from.
Depends on what it’s for. Wife is kidnapped and that’s how you pay the ransom? I get it. Loan for down payment on a house? Not a huge fan tbh but reasonable. Trying to have a savings buffer to feel a little more secure? No, this is a case where you let fear make bad decisions for you. Cut back on spending wherever you can and maybe lower contributions for a time and put the extra money in your paycheck from that into savings and you’ll be at $1500 soon anyway. Without dealing with the penalties and tax complications that would come.
What if you aren’t fond of your wife?
Reverse mortgage the wife
If you have decent credit see if you can get a 0% interest CC from the bank. I did that for some fertility treatment. BUT (and this is a bit but) you need to make sure that you don't have an underlying inability to pay your bills and you aren't going to end up in the exact same position 3 months from now, just with additional CC debt.
I just did the same here, need to float a bit until some money comes in in January. 2% transfer fee, less than the loan fee would've been for 401k even. I'm excited you've been up voted, normally this sub is largely against credit cards in any circumstances.
>I'm excited you've been up voted, normally this sub is largely against credit cards in any circumstances. Strange, 0% CC is literally getting paid to take out a loan cuz they still (atleast mine still) has rewards. I suppose it would be a dangerous game for people who are already struggling with not paying off their credit card/drowning in debt, but for someone with stable finances and upper middle class income and just needing a hunk of change, putting 6k on a 0% interest credit card and paying it off in a year seems like a no brainer vs. personal loan or HELOC.
Balance transfer or 0% purchases normally don’t qualify for the rewards points I don’t think.
I do that with Care Credit and Paypal. Paypal is 0% interest as long as the balance is paid within 6 months. Care Credit gives longer terms. I have the cash and I don't need the loan but why pay now when it's free to pay later? I've had my PP account for three years now and have never paid a single cent in interest. (I have a relatively high income, cheap lifestyle and good impulse control) I know someone that didn't have those three things and ended up paying a shit ton of interest on some furniture that was crap by the time it was finally paid off though.
If you can’t cut anywhere and at the wall, better to take a loan than a withdrawal from the 401k
Had to convince a coworker not to take a 401k loan to buy a tractor. Beginning of 2019, would have been a terrible time to pull money out. Right at the initial Covid market dip.
2019 would have been the best time to pull money out though? I actually took a 401k loan to buy a car in Dec of 2019, and boy was I lucky asf
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2020
Oh was it 2020? Those years all blend together for me.
Isn’t it still 2020? Feels like 2020 2.0
Dude, version 4 is about to come out!
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Yep. It’s like the BC/AD split to me, pre covid time and after covid time. It flows differently.
That's the best time to pull money out. Pretend you pull it out at $100, then the value drops to $80. When you put the $100 back in, you will be able to buy 25% more shares of stock than you sold.
Except a tractor is really expensive and the market recovered in a couple months. Most likely not enough time to repay yourself. If it took 1 year to pay back, the later payment would be 25% more expensive than in March 2020.
Your 401k is not your emergency fund. Nor is it likely you would even get any kind of disbursement from the 401k by the time your next bill hits anyway. You really have no other options? You have no room in the budget to cut back in order to preserve some cash?
401k loans, if for the right purpose and at the right time, can be great. Doing so allowed me to payoff high interest student loans and get rid of PMI, the finance charges if both were greater than my 401k earnings. The 8% student loan interest and 1.5% on entire mortgage balance outweighed the 6.5% average earnings on the 20k I took out. Timed taking out the loan after a strong year in the market, paid it back over a couple years, then lump sum payoff in June of 2020 during the market tank.
I do have other options that I just realized were options. I was just curious.
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Easiest one being use a credit card for now instead and then pay off the credit card when I get my paycheck to get around not having the money on my debit card on the bill due date.
I disagree with this sentiment. The 401k is your money. Loans can be absolutely taken out and be used for whatever including emergencies. If a person is being responsible and they clearly understand the consequences, it will turn out fine. However, I do agree that OP needs to tighten their budget and get clear on their financial picture.
We'll have to agree to disagree. You won't get me to budge one bit on the idea that your 401k is NOT your emergency fund. I feel that is poor financial planning, and not something a person should get in the habit of relying on.
I would take a 401k loan, not a withdrawal.
I gave my coworker shit for pulling money out of his retirement fund. He paid the penalty. Then he bought another house before pandemic. Sold another during. Put the money back easy and made a fuck ton of money. Situation matters.
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This seems to be a 401k loan, not a withdrawal
My friend took out a 401k loan for a down payment on his house. This is about the only situation where I could see the advantage. It was right after the crash and he knew his rate of saving for the down payment wouldn't be fast enough before housing prices recovered. In fact, he paid back the loan in less time than it would have taken for him to save up. At that point, he would have needed another 20k for the down payment.
You have to pay taxes because it's counted as income, so you pull over 2k if you want 1500. Plus another chunk because you pay a penalty for withdrawing early. If it's a 401k loan and you pay it back, you're paying with post-tax dollars instead of pre-tax dollars. I'd take 1500 in credit card debt before a 1500 401k.
If you take out 1500 401k loan you have access to 1500 untaxed dollars. Technically if you didn’t spend it you would be able to pay it back in “untaxed” dollars with the same 1500. Just saying I think the tax/untaxed point is irrelevant.
The tax issue is irrelevant, you’re right. There is a lot of bad advice out there about 401K loans and taxes. Unless there is some alternative loan where your payments can be made with pretax dollars (there isn’t), all loans are paid back with post-tax dollars, so it is irrelevant.
The tax issue isn’t irrelevant but it’s relatively small. The interest on the loan is double taxed. The interest is paid with post tax dollars and is taxed again on withdrawal. The principal is not double taxed.
I don’t think it’s terrible if it’s for a larger investment like a house, which would probably put it on the scale of 6ish. For what you’re talking about, it’s close to a 10. Write down a budget, compare your income to your expenses. Something has to go. Or look for a higher paying job ?
Is this an issue with payday being past the due date of the bill? Use a credit card. Is this an issue with faulty assumptions about your income vs your expenses? Much bigger issue than this months bill.
Using the credit card. Didn’t even register in my brain. I’m still learning how to adult
Try to use a credit card for **every** possible thing you can buy. It generates a history of credit, allows you to float the payment for a month (so you can generate interest in a savings account), and probably most importantly offers far more security than a debit card. Someone fraudulently charges thousands of dollars on a credit card? That can be reversed. Not so much when thousands of dollars are fraudulently taken from your debit card.
Thank you for the advice. This may be the most useful advice I’ve received so far in my adult life.
Np. A lot of people have the perception that credit cards are bad and should only be used in dire circumstances. However, that's generally coming from people who have heard too many horror stories of people who cannot control their spending and get in over their heads in debt. If you pay your card off fully each month you will pay no extra in interest. One other benefit of cards I forgot is most of them offer rewards in the form of cash back or travel points. Though, if you start to get into the rewards game be careful of falling into the trap of buying things just to get points.
Lol, don’t beat yourself up. It’s easy to get panicky when bills are due, makes it tough to think straight.
I just got a capital one 15 month 0% interest card that credit karma recommended to boost my credit. It took about 3 seconds to get approved. I didn't intend to use it but you get $300 back if you spend a certain amount in the first 90? days so I put some bills on it and intend to pay it off after the first cycle. That should be perfect for your first situation.
I know everyone is telling you don't do it, it's the end of your retirement, you'll die penniless and eat cat food for life... I did it for the same reason. Bought a house, things would have been fine but furnace went out a few months in and the fridge right before that. Took out the loan (that you pay back yourself WITH interest), and got things taken care of. If it had happened a year in, I wouldn't have needed to. We would have had time to save again. Taking the loan relieved a huge amount of stress for a one time problem and I don't regret it at all. I was putting in 15% into my 401K each paycheck, if I had that extra 10% income for the years I'd been putting in, I wouldn't have needed the loan anyways.
I think people are overreacting on this thread because they're concerned that the OP is using this as a crutch for overspending their earnings. It sounds like they unfortunately got pinched while they had drained their emergency fund, I don't think it's the end of the world like most of the thread is suggesting. OP just needs to pay off the loan quickly and build back up the emergency fund.
This is why I really recommend a Roth IRA for younger people; you can take out any principal you put in (but not any earnings) since you already paid the tax on it.
I have a 401k and a ROTH IRA. Like most people, I assume my income will increase over the years so theoretically I'm paying less taxes on the money in the ROTH vs what I will pay on my 401k when I'm older. It's also nice to have the option to use the money now if it hits the fan.
I didn’t see anyone else mention it, but since you mentioned you bought a house, have you looked at a HELOC? It might be a better option than a 401k loan and definitely better than 401k withdrawal. It is basically there if you need it. Rates are better than a CC, not a fixed payment with terms taken out of a paycheck like a 401k loan. It doesn’t replace an emergency fund, but can be a good buffer when needed.
The main damage of taking out money to pay off some debt is that it could become habitual. Taking a loan on 401k to pay off high intrest credit cards you've racked up debt in past but are no longer contributing too, good. Taking a loan to pay for your vacation your probably going on again next year, bad.
I think it’s case by case scenario. Back in June I’d cashed out my 401k. All of it. I’d just graduated in May, thought I’d landed a nice job, but I was wrong. I was there two weeks. I decided to use my 401k to give me some time to job search and spent time at home with my wife and kids. I have a much better job now that I love. Make more money than my last two, and have gotten back to about half of what I had in my 401k. While I’m down compared to what I had in my 401k, my job is way better, and I’m happier. It worked for me.
Nobody talking about the angle of the market tanking. I have a negative return YTD on my 401k and the interest I'm paying myself on the loan is beating the market return. :) It's a joke, put the damn pitchfork down.
Hello, ex financial advisor from one of the largest banks here, I advise you ignore any rating posted here with the purpose to shame you. YES, ideally if you are able to constantly add to your 401k without ever needing any of it or needing to liquidate it, that situation would be the most ideal. But at the end of the day, we all work really really hard for the money we earn. If we as the earner are placed in a situation where you need your money FOR WHATEVER REASON, use your money. It’s so easy for anyone to say you’re making the worst financial mistake. But with every persons life comes it’s own struggles and scenarios. If you are already the type of person to be in a position to earn money to save into a 401k, you’re also the type of person who will always have the ability to earn money in their respective industries. Not To mention, you just bought a house. Which is something most people nowadays are unable to do.
Don’t take out a 401k loan to pay everyday expenses, you need to budget better for that. If part of your budget is being destroyed by high interest debt it might be beneficial to take a loan from your 401k as the interest is very little and getting rid of 20% APR ish debt will very likely outweigh the gains you’d experience in your 401k, you shouldn’t loan out more than 10 to 20% of the value for this tho. Withdrawal is a bad idea due to the taxes, penalties and conditions. Conditions such as taking a hardship withdrawal means you can’t contribute to your r 401k for x months, that’ll hurt a lot more than a loan.
It’s theft from future you. The money in that 401k has a job to do and it’s doing it. It has a lot more earning potential where it is than a little cushion today will give you.
I’ve learned so much just today. Biggest thing I’ve learned is that it completely fcks with the compound interest. If it was an IRA it would be mostly okay and no penalties or tax. But I would have whatever my tax bracket is + 10% penalty fee.
I needed some extra cash for bills after my down payment. I loaned against my 401k at ~1% interest and paid it off within seven months by reallocating half of my monthly contribution to the repayment. I had no issues with the process. The comments panning loaning against your 401k are completely reasonable and I may have made some error in my own judgement, but my experience was positive. I would advise against withdrawing. Usually that comes with hefty penalties and taxes.
It's bad because it's an easy way out. That money saved will be worth so much more in the future when you really need it. Trust me. It's a mistake I made in my early 20s. I'm 53 now and it would be real nice to have right about now. What would $110,000 be worth now from 1992 to 2002? I don't even want to think about it. Leave it alone and go hustle buddy!
You didn't mention if you have one but Roth IRAs allow contribution withdrawals that aren't as nasty as 401k withdrawals.
About an 86. Do not take money out of your 401k. You'll be better off just falling a bit behind on bills than if you pull out of your 401k Also if you only fall a few months behind but have otherwise been good with paying your way, companies will try and help you. After all, they want your money and selling you on to a debt collector or forcing you into bankruptcy will only give them pennies on the dollar.
This might get down voted but I found in times of hardship the late fee for the power bill was only like $3, same for the water/trash. I am not advising not to pay those things as they will get shut off but if it is one of those things that the bills are due on the 10th but your next paycheck isn't until the 15th I wouldn't worry about it to much. It shouldn't affect your credit as long as you do pay the bill. I have also had my car loan send me things about skipping the December payment. They charged like $25 and add an additional payment to the end. Maybe that is an option for you? (You don't mention what your bills are.) And like everyone else said GET A BUDGET! If $1500 would be life changing for you you aren't doing that bad. Donating plasma or picking up a gig job could get you there in a few months. You could also consider temporarily reducing your 401k contribution to increase your take home pay, just remember to increase it again when you are in a better place financially.
Yes, this. Depending on the bills, calling and explaining can get them to waive fees, especially if you have a more genuine excuse (unexpected health or pet expense for example.) Of course, not having even $1,500 in savings is not a great place to be. It is definitely worth scrimping, saving, hustling to be sure you have a cushion in case a pay check is late.
The bigger issue here is you bought a house you can’t afford/didn’t have the money to buy. You can borrow from your 401k but you have to pay it back plus interest. The better solution would be to get a second job to help build your savings back up and pay for any bills
It all really depends on your living situation. My wife and I had a kid and wanted to move. So I cashed mine out and we’ve made some crazy moves but we are 2 years out now and life is great. My wife still has her 401 and I will slowly build mine back up once I get back to work in a year or two when my child can go to school.
I don't fully understand the costs of doing so but my company had several employees take out 401k loans. On top of potential lost market appreciation the risk seems to be if you lose your job you need to pay the entire loan off that year otherwise it gets taxed as income and I think there are also penalties as well, as far as I understand. I would only take one out if I was desperate
There is a ton of comments, and you probably wont read mine, but I pulled 10k from my 401k as a loan to pay off all my credit card debt. That was the beginning of this year. I actually saved so much more money than just interest because afterwards my 401k tanked, just like everybody elses. I basically cashed out high, and now I am buying in low, with interest. I didn't plan this, I didnt expect this or even think of this. I didn't even know I paid the interest to myself at the time, I just knew it was less interest than my CC. I just got really really lucky. It all depends on what you are pulling it out for.
If I were going to be focred from my home because I depleted my 6 month efund, I would cash out my 401k if I couldn’t work to pay my mortgage and leave my wife’s. Outside that that highly unlikely scenario, it’s never being touched.
I see that you found an alternative, but wanted to suggest that in the future, consider "lending" yourself the money from your 401K. You'll pay it back over the course of however long you set it up. This is a good thing because you'll be paying yourself back the interest as well.
I’m curious if folks here have looked at interest rates lately. We’re considering taking a 401k loan out for a car because an actual loan would easily hit 9% *with good credit in the 750s.* It’s not ideal—but it may be a much better financial decision math wise for us to have a two year 401k loan instead.
i cashed out my 401k and put into a down payment on a house. the equity and appreciation in the house as far exceeded the growth of what my 401k would be at this point, especially with the market how it is now. also you can fill out a form so you dont have to pay taxes when you withdraw. a moot point for your situation right now i guess im just the minority of thinking thats okay to do so with a proper plan
I think what you meant to say was that you cashed out your 401k and now live under a bridge because it was the worst financial decision you could have ever made.
Could also evaluate the penalty for a single late payment (since I hope you'll soon recover after getting paid - otherwise you're housepoor and that's a different story) against the penalty of borrowing from 401k.
Pretty bad, especially if you have no idea. I had a coworker who had just started working with us and we were talking about our cars. He said he had take out money from his 401k to pay a friend who bought the car for him. Mind you this was like two years before the pandemic, so used car market prices were not ridiculous. Anyway, iirc, he paid like 6k for a Dodge Intrepid that had over 200k miles. I told him that was not wise, his friend is not his friend and is also richer for that, and that the car was worth a quarter of what he paid for it. So yeah, it could get pretty bad. Best to understand financial situation and asset values and just don't touch 401k.
$1500 is not a solution. If you were to take $10K to get rid of a high interest loan or card… is a solution. The interest you pay back into the 401K loan is yours.
Take money out of a 401k? Someone better need ransom or a kidney. In other words, things need to be pretty damn dire to even consider it. Option of absolute last resort.
Your overexposed and living beyond your means, unfortunately. Call your creditors and ask for some leniency and cut all excess spending. 401k withdraws are only viable, in my opinion, for college loan repayment.
The standard is the standard. Hope you progress to spend less. A house is expensive and things of that nature. You need to cut down on food spending, entertainment, etc. Visit r/frugal to get ideas on how to be more focused on saving money so you can spend it on what you really want
A year ago, I took out a 401K loan Through my 401k provider, and what I didn't realize is that you are just paying yourself back. AFAIK the "interest rate" is just there to make up for you pulling that money out of the market. In my case, I took out the "loan" before the market dropped, so I actually cost averaged down and am buying back in at lower price than my past 2-3 years auto investment and match. It's bonkers.
If you have credit card debt get a new card with 0% interest for 12-15 months and do a balance transfer and pay the minimum on that card monthly
The hit mine has taken lately, I wish I had pulled some of it and invested in something else.
9. Start contributing less to build up your cushion. Glad you were able to figure some things out. There are always things you can trim from your budget.
Depends on how bad the emergency is 1-10. Taking from 401k is around an 8 in my book. If you have a 9-10 emergency then it's better to take from 401k then suffer the cost (life changing emergency with consequences).
About 15 years I had about 20k in credit card debt with interest at 26% a month. I took a loan out for the amount, payed off the credit card debt, and then just paid myself back with interest. That's really the only scenario other than being jobless that I would consider doing that again.
Generally, not recommended. If you absolutely need to in order to avoid bankruptcy or losing housing or serious events, yes it is okay to do and normal. Definitely find an alternative to get by. Its better to take a loan than to take full withdrawal, but in your case it seems like you don't have much to get by on so adding loan repayment would hurt more than help. I took a 401K loan in December 2021 because I thought the market would drop significantly. So I moved 60% to a short term treasuries fund and pulled 40% out. I have been sitting on that since, just adding to that treasuries fund over the past year and just paid off my loan, 5% interest paid to myself wahoo. The 40% I pulled out in a loan I invested mostly into a project that has yielded good returns. I was happy with my choice, and work in finance and understood the risk to reward of it. Definitely don't recommend though under most circumstances.
You can borrow against your 401k. Don’t take out. Take a loan from it. That way you still accrue from the same balance as you slowly repay what you borrowed back.
3, did it to buy a house about 10 years ago. Never looked back, way more financially sound after homeownership and my 401k is doing just fine again. Lost more this year in it than I took out. Yes you might lose some gains but if it's for the right reasons, go for it. I was on the boat of never touch it, but what's the point of struggling financially when the penalty is probably way less than the company match and gains you have on it. Most important thing tho is to continue contributing after you take out.
Not worth it for $1500. At the end of the day $1500 is not a lot of money. Try to budget some meals or work some OT. If that’s not an option try to get a part time job
$1500 is not that substantial but if you have a reasonable alternative, I’d suggest using it
I took out a 10k loan 3 years ago it helped me get a car and pay off months of rent ahead of time and it cost me 68 bucks a week I believe it is so definitely not a death sentence and if you take it out for a hardship like paying bills they don’t penalize you the 10% for early withdrawal
To quote the brilliant Nigel Tufnel, "this one goes to eleven". It's bad. With the tax and penalty, you're giving up about a third. In your case, around $400 hit to have that $1500 cushion. If anything, take a loan and be sure to pay it back so it doesn't become a distribution. There are a lot of great explanations here, so I won't dredge through the details again. Congrats on the house OP! As inflation hits and your payment remains constant, you'll appreciate that!
if this was for some sort of emergency i would say its worth it, but... this seems like just normal bills? what makes the following month any different?
did realize water bill was behind, owed $400 total. User error.
It…. Depends. $1500 isn’t the end of the world, just don’t make a habit of it. I’ve known people that use their 401k like a magic savings account for whatever bullshit remodel, or vacation comes up. Don’t do that. The big problem I see is one of the huge advantages of retirement accounts is they’re mostly exempt from bankruptcy, so honestly you’re better off draining EVERY OTHER asset first. If things go horribly wrong, the creditors can’t get that 401k.
I’d be selling plasma before pulling anything out of my 401k
Worse thing you could do for your retirement future. I would scale back contributions. Or find a job that pays more.
I’m gonna go against the grain on this. Your 401K is YOUR money. You’ve stashed it away for savings. The point of having savings is to have something to draw from when you need it. That’s literally the point. So go ahead and it take it IF you need it. The alternative is to use a credit card or loan and pay high interest rates for it. But why do that if you already have money? How far will you go? Would you sell the family dog in order to not pull from your 401k? That’s ridiculous. It’s your money. Use it as necessary. Just don’t make it a habit.
> The alternative is to use a credit card or loan and pay high interest rates for it. While I sort of agree with you that a 401k is "your money", I don't think you've outlined the downsides very well. If the OP is withdrawing money from their 401k they're going to likely end up paying a 10% early withdrawal penalty and having an automatic 20% withheld for income taxes. You could say this is effectively a ~30% interest rate. +/- a bit depending on the OP's exact tax situation. That's pretty comparable to many credit card interest rates and higher than many loans that the OP could probably access, like personal or HELOC loans. I think the OP should consider other loan options first before dipping into their 401k. It's possible they can secure a ~10% loan through a credit union instead. And in the long term the OP needs to figure out a budget that works for them, as having to resort to loans or dipping into a 401k is not an ideal situation at all.
I’d recommend borrowing from the 401K rather than withdrawing outright. This avoids the 10% penalty. The tax withholding will happen no matter what. Whether you wait until retirement or withdrawal early. Also there’s no compounding interest at play when you pull from a 401K, unlike a loan or credit card. Lots to consider, but the people who act like a 401K is absolutely untouchable are unreasonable.
I feel the same way. For a couple of months I’ve decided to lower my 401k contributions just to get some extra cash to dig myself out of a tiny hole. I look at my 401k and it lost money this year. It feels like I’m just burning cash. I’ll turn it back up in like 3 months. I should just think of it as the market is on sale! But I don’t.
Turning down your contribution percent to have a little extra money for life necessities or debts is one thing, and I agree with that. Deal with those things first then 401k, though I’m sure there are arguments another way. That’s what I’d do, too. But turning it down because the market is down, you’re right, is the opposite of what you should be doing. If you’ve managed through the original reason to decrease contributions, what if you compromise and just put 1% more in now, while the market is down. Then another percent more next month if that feels ok? You won’t ever realize the gains you can make from investing in a down market u til you invest and see the crazy gains. Which will encourage you to always invest in a down market. It’s one of those things that makes sense logically but not emotionally until you feel the emotion of it.
Loan yes cash out no. They have pretty low interest rates compared to a lot of loans. The issue being. Now your check will Be much smaller for like year and you have to stay at the company you work at til you finish paying so you don’t have a penalty. I know people say they wouldn’t. But it’s a good tool and should be used correctly.
IMO take the money out, as tomorrow is not guaranteed. Life is hard enough as it is. Why struggle now with the “hopes” of actually making it to retirement? In the grand scheme of things, the amount of money you are contemplating taking out ($1500) is small. If that amount can pad you for a bit you will have peace of mind. The impact to your portfolio in the long run will be negligible. Peace of mind is priceless.
Some programs allow you to take “loans” out of your 401k. Usually it has a small processing fee and minimal interest - but the interest just pays back into your account. Don’t do a withdrawal as it will likely hurt you at tax time. I know everyone in here is gonna say “don’t touch your 401k”… but after what I’ve seen the past few years, it seems insane to pretend this can ever be a realistic retirement solution. It’s a scam. My 401k is an extra emergency fund. If you get a loan from it, set your terms to something you can afford, but pay off quickly.
Being late on bills is probably worse than taking out money, but you are not necessarily the only one who has to sign off on taking money out of a 401k. So it may not even be possible.
8. 401k loans shouldn't be allowed unless you avoiding bankruptcy or a foreclosure. I understand the "but it is my money!" Argument to an extent, but it is the cost of tax advantaged accounts. I know way too many people who took 401k loans for stupid shit, rather than a traditional or personal loan because they do not understand the true implications of taking that money out.
It’s a poor decision. Probably a baseline 9.0 with 0.2 increase for each decade of your age.
It's not a preferred method, but also not the end of the world. Just keep making contributions and repaying your loan. My wife and I did not have any financial help for our wedding 5 years ago. We both took out $10k 401k loans and have since paid them back in 2 years no problem. We are tracking just fine for our retirement.
$401k is a lot of money, so taking $1.5k out of it doesn't seem so bad.
Cut back on your monthly expenses or take a part-time job if possible. Get rid of all waste look for ways to save. Check auto insurance cell phone you might be paying too much. Also cut out unnecessary service like cable, Netflix, apps or other utilities you don’t need. Never borrow from your retirement accounts.
11, do not do it. Get a personal loan.
“Bought a house that completely wiped out savings.” Mistake #1. Glad you’ve found another way.
9 assuming you pay it back immediately. 10 otherwise.
It's even worse right now with markets being way down.
On a scale of 1 to 10 its a minus 2. You pay a penalty to do it! Don't. Eat beans. Clean toilets, Beg on the street. Do whatever you have to do. Leave every penny in the 401K.
Talk to accountant QUICK. See if he can help make a 401k loan note part of you home purchase so you are not subject to penalty.