A 401K Gold Bullion Strategy!?

[Drewskers]

I don't have a 401K to worry about, but many of you do. So I am posting this ingenious strategy I saw on Kid Dynamite's blog.

http://kiddynamitesworld.com/sprott-to- ... d-but-why/

To quote from Paul Weeks's comment (the first on that post):

"I personally took the biggest loan allowed out of my 401K to buy physical PM. I have the metal and I pay my 401K back over 5 years at 4.5% and the interest goes right back to me. If I could buy a PM fund inside my 401K I may have gone that route instead. I have all of my remaining 401K (not all of my retirement funds, most of my stuff is in rollover) in MM earning a big fat 0%. Not because I'm a conservative investor (I'm certainly not), just because I don't like any of the stock or bond funds at this juncture and we don't have company stock as an option."

Obviously he's not implementing a PP but I can see no reason this would not work for the PP! Maybe there is a catch ... I submit this for your consideration.

[MediumTex]

A 401(k) brokerage window is a more direct path to the goal.

If you do use the loan option you obviously have to make sure that you have the extra cash flow to repay the loan.  Also, the interest payments will be taxed twice--they go into the plan on an after-tax basis but are still taxed upon eventual distribution (which is not a big deal, but should be part of the decision making process).

[AdamA]

Taking a loan against a 401K is a great way to rebalance.  I've done it once myself.  My plan only allows one loan at a time, and you can't reborrow for 60 days after you pay it off.  I really like having the option, though.  It's worked very well for me, and hasn't caused me any problems.

[AgAuMoney]

Taking a loan against a 401K is a great way to rebalance.  I've done it once myself.

Agreed.

Another caveat to watch out for is that most 401(k) plans require immediate or very accelerated payment of the loan balance if you lose or quit your job.  If you don't pay it back, it is counted as a distribution and you have to pay taxes (and any penalties due for early distribution).  (Some places will tell you this immediate payback is an IRS requirement, maybe it was once, but it was not in 2008 when I did it thru at least now.)

And one final caveat, fees.  If there is any kind of recurring fee for a 401(k) loan, the advantage goes away really fast.  An initial fee of $50-$100 is pretty common and if you are doing the max $50,000 such a fee is hardly significant.  Of course, a $100 fee on a $10,000 loan is 1% so you need to be aware of any fees.

As for the whole "taxed twice" business...  It's much ado about nothing.  If you have a pre-tax 401(k) you will always have to pay taxes when you take distributions from that 401(k).  If you have any loan you will pay that loan with after-tax dollars and a 401(k) loan is no different.  With a 401(k) loan you will at least pay back the loan to yourself which allows you to put more money into the 401(k) than you could otherwise.  And if you invest the loan proceeds, maybe you'll earn more than it would have in the 401(k).

[smurff]

I read somewhere yesterday that Congress was trying to eliminate or substantially reduce the ability of owners to borrow from their 401Ks. 

I guess they were annoyed that too many people took the money out to buy Mercedes and Beamers, or to do some other fun but non-government-approved activity, like pay for vacations.

[Lone Wolf]

Taking a loan against a 401K is a great way to rebalance.  I've done it once myself.  My plan only allows one loan at a time, and you can't reborrow for 60 days after you pay it off.  I really like having the option, though.  It's worked very well for me, and hasn't caused me any problems.

If you don't mind discussing it, I was curious how you used the 401k loan for rebalance purposes.

[AdamA]

If you don't mind discussing it, I was curious how you used the 401k loan for rebalance purposes.

I have a good stock index fund and a good treasury only money market fund in my 401K, but no LTT's or gold, so I borrowed to buy gold and long term treasuries when I was first setting up my PP.  I have been slowly paying it back since.