Gyroscopic Investing

Anybody have opinions on this?  From what I know, so far, you borrow a certain amount and pay interest to your own 401(k) account and repay the loan over 5 years.  This seems to me to be another way, if used properly (I think most of us here are trustworthy with our own money), to keep even more money tax-deferred than you normally would, yet still give yourself the ability to use it if need be.

Even if to pay for a car or something relatively short-term, it could work well. 

I don't know any of the hassle or paperwork or limitations involved, but I'll look into it.  I'm anxious to hear peoples' opinions on this.

The only problem with a 401(k) loan is that the interest is going into the plan on an after-tax basis, but you are still going to have to pay tax on the entire distribution whenever it eventually comes out of the plan.

In other words, the plan does not separately account for the interest as an after-tax contribution.  It all gets lumped into the pre-tax account.

Even though this is a bit unfair, it is still better to pay yourself interest than a third party creditor.

Also, if you leave your job most plans require that you pay any loan balance in full.  A few plans will permit you to continue paying down the loan after you terminate, but not many.  Thus, your job plans also play into the decision about whether a 401(k) loan is a good idea or not.

My opinion on this is that borrowing from a 401K is something to do in dire emergencies (or unexpected opportunities), but not on a routine basis.

I looked into what it would take to borrow from my 401K when the financial crisis hit.  I wanted to take advantage of Mr. Market's gift of a substantially-lower Traditional IRA balance and Rothify it, but the rollover would trigger a huge tax bill.

I ended up being able to pay the taxes out of my regular cash reserves, so I didn't go through with the 401K loan.  But the experience of doing the look-see was a good exercise.

My rolled-over IRA has since recovered in value, but the taxes on the rollover were much lower than they would have been had the financial crisis not happened.

moda0306 wrote:
I don't know any of the hassle or paperwork or limitations involved, but I'll look into it.  I'm anxious to hear peoples' opinions on this.

I have done it.  It's a great way to rebalance.  

I wouldn't do it to spend the money on anything unless I had to though.  

I read an interesting article about someone using their 401k to start a business.  Apparently the IRS will look at you with a fine-tooth comb, because you can imagine that a lot of people would like to withdraw money early and use it for "business" expenses like cars and houses.

http://www.smartmoney.com/personal-fina ... 954156604/

Storm wrote: I read an interesting article about someone using their 401k to start a business.  Apparently the IRS will look at you with a fine-tooth comb, because you can imagine that a lot of people would like to withdraw money early and use it for "business" expenses like cars and houses.

http://www.smartmoney.com/personal-fina ... 954156604/

Worth noting that qualified retirement accounts less than $1 Million are shielded from creditors during a bankruptcy.  So if a person obtained a personal line of credit and maxed out credit cards instead of tapping the 401k to start a business and it fails, personal credit would be ruined for 7 years but the 401k would still be in tact.

I'm not saying 401k loans don't make sense in certain scenarios.  I think maxing out tax defferal in the 25%+ brackets is worth pursuing instead of building an emergency fund in some instances.  But people should be aware of the benefits 401k & IRA accounts offer from creditors.

I'd say the 401(k) loan would be a great post-bankruptcy option to allow people a little bit of the spending money that ruined credit may have kept them from.

Of course this is in the context of responsible purchase... not a Porsche and a vacation.

Bankruptcy and lawsuit considerations are ANOTHER reason to keep as much of your wealth in tax-deferred funds as is reasonable, with considerations that roth basis and 401(k) loans are accessible... moreso the Roth.

I've read where you can use IRA funds for non-traditional investments.  Most of the how-to books about these kinds of investments involve real estate, but starting a business is also possible (http://guides.wsj.com/small-business/fu ... -start-up/).

One approach is to roll a 401K into an IRA, which is usually possible after you have left a company.  But anything that does not involve traditional investments (e.g., cash, publicly-traded stocks and bonds) takes specialized knowledge to keep them from running afoul of the tax laws.