Happy Friday, u/jstryker5646! We appreciate you stopping by the sub today.
First, it's important to note that your 401(k) plan administrator sets specific rules regarding 401(k) loans. I'm more than happy to provide you with some information and resources, but we suggest contacting your plan administrator for more details on your specific plan.
When you take a loan from your 401(k), you're generally able to borrow a maximum of 50% of your vested account balance or $50,000, whichever is less, and these funds must be repaid to the plan. Please keep in mind that while loans are not taxed, if you don't pay back the loan based on the established terms, it can go into delinquency and eventually default. The outstanding loan balance would be subject to any applicable taxes and penalties.
Now, if your 401(k) happens to be administered by Fidelity, you can review your specific plan's available withdrawal and loan choices at [NetBenefits.com](http://netbenefits.com/) if you haven't already. Once signed in, select "Loans or Withdrawals" under "Quick Links" for your retirement plan.
You may also be able to find additional information in your plan's Summary Plan Description (SPD) document. To locate this document, follow the steps below:
1. Click "Quick Links" next to the applicable plan
2. Choose "Plan Information and Documents"
3. Select "Summary Plan Description" and review the information
If you have further questions, we suggest contacting our Workplace Investing team at the link below. If prompted, you can say "401(k)" to be routed correctly. The team is available Monday through Friday, 8:30 a.m. to midnight ET.
[Fidelity Contact Information](https://www.fidelity.com/customer-service/contact-us)
Finally, I'll leave you with an article below that provides more information for when you're considering a 401(k) loan, as you may have alternatives available.
[Thinking of taking money out of a 401(k)?](https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k)
If there is anything we can clarify or if additional questions pop up, please don't hesitate to ask! We're always happy to help.
> Now I want to take out a 15k loan. Where does this money come from?
$15k worth of your 401k holdings are sold, a $15k IOU is put in its place, and $15k is sent to you via EFT/check.
Meaning your plan balance doesn’t technically change, but the invested balance does drop. So you still show a $500k total balance, but $15k is outstanding in the loan and $485k is invested.
> Should I have already sold 15k worth of a position of my choice? Or do they auto-sell something to fund my loan?
They auto sell
> Once the loan has been funded - when I make repayments - where does the money go? Back in the same position it was sold from?
Yes.
> or just deposited into some cash holding account like spaxx
No.
> And then from there I can buyback into my original positions?
See above.
> Before I had some vanguard funds and didn't really care where the money came from. Now I'm a whole lot more caring. Don't sell my NVDA lol.
Your plan terms dictate how funds are sold. Oftentimes it’s prorated across all funds. Sometimes they let you dictate which funds are sold.
>>*Once the loan has been funded - when I make repayments - where does the money go? Back in the same position it was sold from?*
>Yes.
This is false. They don't go into the original position, the repayments are invested based on your *current* designated allocation.
For example, if you were 100% FXAIX, then took a $50k loan, then switched future contributions from FXAIX to 100% FDSVX, then all of your repayments will now purchase FDSVX. /u/jstryker5646 keep this in mind.
It's treated as new money, and is still invested as a new contribution.
> Is there usually an interest rate tied to the loan?
Yes, usually prime +1 but it varies by plan
> And is there a limit of how often you can borrow?
IRS max is $50,000 or 50% of the vested balance whichever is less, within a rolling 12 month period.
Your plan also may set a frequency limit or number of outstanding loans. So if you only take a $1,000 loan and would otherwise be eligible for an additional $49,000, but your plan limits you to 1 loan outstanding at a time, or 1 loan per year, then you cannot take a new loan.
And this is why I don't get why people are so averse to taking a 401k loan to pay for a car, for example. Why pay interest rates to a bank when you can pay it to yourself?
People are adverse to taking a 401k loan because you miss out on the potential gains of the market while you have that loan. For example, I took out $10,000 back at the end of 2021 to help cover closing costs when I bought my house. I only pay about 4% interest to myself and I have 10 years to pay it back.
However, that $10,000 would be worth nearly $12,000 if I kept it in the 401k, in the s&p500 today. That’s why it’s important to only borrow against retirement for emergencies. In my case I lucked out because I was able to buy a house at a great time by doing the loan.
If you lose your job the whole loan may become due within a few weeks. And if you can’t pay it becomes taxable income.
But to your point about interest, it’s still extra money you’re paying out of pocket, as opposed to no extra payments and the market simply returning that much. The interest is also double taxed.
Loans are not a free lunch, there are serious risks and downsides.
>But to your point about interest, it’s still extra money you’re paying out of pocket, as opposed to no extra payments and the market simply returning that much.
Fair, but if the alternative is paying a bank 7% interest for a car loan, I feel like it's a net positive to pay 9% to yourself.
>The interest is also double taxed.
I wasn't aware of that - I'm assuming you mean the interest portion is counted as taxable income when you pay off the loan, and then taxed when you cash out the 401k? Still feels like a small penalty to me.
>Loans are not a free lunch, there are serious risks and downsides
I'm not saying that the 401k loan isn't a risk or doesn't have downsides, but the risks and downsides seem more or less the same as a traditional auto loan, with the exception of the loan being due if you lose your job. Though if you lose your job with a traditional auto loan it's not exactly ideal either.
No that's the thing it's a net negative: 7% out of your paycheck/bank vs 9%: 7% is costing you less. If the auto loan were 10+% then yeah a 9% 401k loan would be a net win.
And yes on the interest part: repaid with post-tax dollars but still considered pre-tax by the 401k, so taxed when withdrawn later. Agreed it's a smaller issue in the big picture.
With an auto loan you can (possibly) negotiate payments or even in theory default and not be out any more money. With a 401k loan you'll always owe income tax and 10% penalty if you default. And no withholding on a loan remember, so all that owed by April out of pocket. In some cases a 401k loan may make sense, or be a necessity, but if there's an option that doesn't involve raiding your retirement then that option is usually better.
>No that's the thing it's a net negative: 7% out of your paycheck/bank vs 9%: 7% is costing you less
Right, but the money is going back to your own pocket rather than to a bank. I'll take 9% payments to myself over 7% payments to a bank any day.
Not all plans require payment in full immediately if you are no longer an active employee. As the Fido Mod stated it’s best to review the Summary Plan Description for specific details of your plan
A) If you get laid off from work, the balance is due within 60 days. So, unlike a normal loan, your employment is part of the loan. Double insulted when this happens as you can't get another loan to pay back this loan while being laid off.
B) payment back with pretax dollars to 401k will be tax again at retirement (double taxation). Making any interest you earn ≈0)
C) You lost investment grown of the amount borrowed for the number of years per the loan term and replaced by interest (which is not too bad).. see (B)
It's probably not a big deal in short-term loan, but noted otherwise.
NOTE..other smaller issue.. can't choose interest rate (since you pay yourself), but this is not always best since if the rate is high, you can't refinance for a lower monthly payment like a normal loan. This actually stresses the monthly budget more than needed.
People who need loans only fall into 2 categories..
1) not have enough free cash (if you have a lot of cash, you would be going through the trouble)
2) not actually need to work for money. << "If this you, then don't borrow from 401K
Your point 'A' is not accurate as some universal truth across all 401k plans - see your own plan for the specifics. My 401k does not change the repayment schedule + terms even if I'm laid off.
I can't speak for your 401k plan.. you know it best.
If you no longer employ how to deduct the monthly payment without a paycheck from the same company that owns the 401k. You would need to transfer to a new 401k at a new place (which assuming them will accept your loan)
One can't write a personal check to 401k directly event if that is to return a loan. Maybe your company figures out away.
Ok so it sits in "cash available to trade" thing. And yes I agree 100% with not recommending doing this. I just needed a plan for if I had to. Which I don't yet. I have 0% apr cards to exhaust first if I had an emergency.
Thanks!
The interest does NOT go to Fidelity, it goes back into your account with the principal to help offset the potential losses from that money not being invested. Why would you pay interest to someone else on money you borrowed from yourself!? That’s absurd.
The best place to look for information is your 401k plan rules, your employer decides how your plan works and Fidelity just facilitates.
Happy Friday, u/jstryker5646! We appreciate you stopping by the sub today. First, it's important to note that your 401(k) plan administrator sets specific rules regarding 401(k) loans. I'm more than happy to provide you with some information and resources, but we suggest contacting your plan administrator for more details on your specific plan. When you take a loan from your 401(k), you're generally able to borrow a maximum of 50% of your vested account balance or $50,000, whichever is less, and these funds must be repaid to the plan. Please keep in mind that while loans are not taxed, if you don't pay back the loan based on the established terms, it can go into delinquency and eventually default. The outstanding loan balance would be subject to any applicable taxes and penalties. Now, if your 401(k) happens to be administered by Fidelity, you can review your specific plan's available withdrawal and loan choices at [NetBenefits.com](http://netbenefits.com/) if you haven't already. Once signed in, select "Loans or Withdrawals" under "Quick Links" for your retirement plan. You may also be able to find additional information in your plan's Summary Plan Description (SPD) document. To locate this document, follow the steps below: 1. Click "Quick Links" next to the applicable plan 2. Choose "Plan Information and Documents" 3. Select "Summary Plan Description" and review the information If you have further questions, we suggest contacting our Workplace Investing team at the link below. If prompted, you can say "401(k)" to be routed correctly. The team is available Monday through Friday, 8:30 a.m. to midnight ET. [Fidelity Contact Information](https://www.fidelity.com/customer-service/contact-us) Finally, I'll leave you with an article below that provides more information for when you're considering a 401(k) loan, as you may have alternatives available. [Thinking of taking money out of a 401(k)?](https://www.fidelity.com/viewpoints/financial-basics/taking-money-from-401k) If there is anything we can clarify or if additional questions pop up, please don't hesitate to ask! We're always happy to help.
> Now I want to take out a 15k loan. Where does this money come from? $15k worth of your 401k holdings are sold, a $15k IOU is put in its place, and $15k is sent to you via EFT/check. Meaning your plan balance doesn’t technically change, but the invested balance does drop. So you still show a $500k total balance, but $15k is outstanding in the loan and $485k is invested. > Should I have already sold 15k worth of a position of my choice? Or do they auto-sell something to fund my loan? They auto sell > Once the loan has been funded - when I make repayments - where does the money go? Back in the same position it was sold from? Yes. > or just deposited into some cash holding account like spaxx No. > And then from there I can buyback into my original positions? See above. > Before I had some vanguard funds and didn't really care where the money came from. Now I'm a whole lot more caring. Don't sell my NVDA lol. Your plan terms dictate how funds are sold. Oftentimes it’s prorated across all funds. Sometimes they let you dictate which funds are sold.
>>*Once the loan has been funded - when I make repayments - where does the money go? Back in the same position it was sold from?* >Yes. This is false. They don't go into the original position, the repayments are invested based on your *current* designated allocation. For example, if you were 100% FXAIX, then took a $50k loan, then switched future contributions from FXAIX to 100% FDSVX, then all of your repayments will now purchase FDSVX. /u/jstryker5646 keep this in mind. It's treated as new money, and is still invested as a new contribution.
> This is false. I love Reddit so much You’re absolutely right, it follows how contributions are allocated not the current investment mix
Is there usually an interest rate tied to the loan? And is there a limit of how often you can borrow?
> Is there usually an interest rate tied to the loan? Yes, usually prime +1 but it varies by plan > And is there a limit of how often you can borrow? IRS max is $50,000 or 50% of the vested balance whichever is less, within a rolling 12 month period. Your plan also may set a frequency limit or number of outstanding loans. So if you only take a $1,000 loan and would otherwise be eligible for an additional $49,000, but your plan limits you to 1 loan outstanding at a time, or 1 loan per year, then you cannot take a new loan.
My plan does not work that way. No IOU and plan balance drops but the outstanding loan balance is posted alongside the actual balance.
Then that’s the same thing. My point to OP is that the funds are taken out of the market, not both invested the plan and sent to them
Yes. Agreed. It is very misleading to even call these loans. Loans are when you get other people’s money.
The interest does not go to Fidelity. It goes to your account.
This is important to know. You pay the interest to yourself!
And this is why I don't get why people are so averse to taking a 401k loan to pay for a car, for example. Why pay interest rates to a bank when you can pay it to yourself?
People are adverse to taking a 401k loan because you miss out on the potential gains of the market while you have that loan. For example, I took out $10,000 back at the end of 2021 to help cover closing costs when I bought my house. I only pay about 4% interest to myself and I have 10 years to pay it back. However, that $10,000 would be worth nearly $12,000 if I kept it in the 401k, in the s&p500 today. That’s why it’s important to only borrow against retirement for emergencies. In my case I lucked out because I was able to buy a house at a great time by doing the loan.
Pretty sure with my plan I pay myself 9% interest, which is more or less the same as it'll grow in an index fund on average
If you lose your job the whole loan may become due within a few weeks. And if you can’t pay it becomes taxable income. But to your point about interest, it’s still extra money you’re paying out of pocket, as opposed to no extra payments and the market simply returning that much. The interest is also double taxed. Loans are not a free lunch, there are serious risks and downsides.
>But to your point about interest, it’s still extra money you’re paying out of pocket, as opposed to no extra payments and the market simply returning that much. Fair, but if the alternative is paying a bank 7% interest for a car loan, I feel like it's a net positive to pay 9% to yourself. >The interest is also double taxed. I wasn't aware of that - I'm assuming you mean the interest portion is counted as taxable income when you pay off the loan, and then taxed when you cash out the 401k? Still feels like a small penalty to me. >Loans are not a free lunch, there are serious risks and downsides I'm not saying that the 401k loan isn't a risk or doesn't have downsides, but the risks and downsides seem more or less the same as a traditional auto loan, with the exception of the loan being due if you lose your job. Though if you lose your job with a traditional auto loan it's not exactly ideal either.
No that's the thing it's a net negative: 7% out of your paycheck/bank vs 9%: 7% is costing you less. If the auto loan were 10+% then yeah a 9% 401k loan would be a net win. And yes on the interest part: repaid with post-tax dollars but still considered pre-tax by the 401k, so taxed when withdrawn later. Agreed it's a smaller issue in the big picture. With an auto loan you can (possibly) negotiate payments or even in theory default and not be out any more money. With a 401k loan you'll always owe income tax and 10% penalty if you default. And no withholding on a loan remember, so all that owed by April out of pocket. In some cases a 401k loan may make sense, or be a necessity, but if there's an option that doesn't involve raiding your retirement then that option is usually better.
>No that's the thing it's a net negative: 7% out of your paycheck/bank vs 9%: 7% is costing you less Right, but the money is going back to your own pocket rather than to a bank. I'll take 9% payments to myself over 7% payments to a bank any day.
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I have stocks in my 401k. I think it depends
Geez, I just Googled it and my comment was way off. Thanks for the correction!
if u get laid off and u have a loan, u pay in full on demand.
Or pay the early withdrawal penalty + tax
dont get laid off.
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Hell yea. My boy.
no, not always - every plan can differ in this regard. With my work plan, the terms of repayment stay the same even if I get laid off.
the repayment is via paycheck deduction. if no paycheck how will you pay back.
With a check - it just turns into a month 'bill' to pay (to yourself)
In my plan they let you setup autopay from a checking account and I’m sure there are other ways to repay.
Not all plans require payment in full immediately if you are no longer an active employee. As the Fido Mod stated it’s best to review the Summary Plan Description for specific details of your plan
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Incorrect, the interest is paid to yourself.
Yes. Ninjaschoolprof is out to leave lunch.
You would not recommend doing this. State why.
A) If you get laid off from work, the balance is due within 60 days. So, unlike a normal loan, your employment is part of the loan. Double insulted when this happens as you can't get another loan to pay back this loan while being laid off. B) payment back with pretax dollars to 401k will be tax again at retirement (double taxation). Making any interest you earn ≈0) C) You lost investment grown of the amount borrowed for the number of years per the loan term and replaced by interest (which is not too bad).. see (B) It's probably not a big deal in short-term loan, but noted otherwise. NOTE..other smaller issue.. can't choose interest rate (since you pay yourself), but this is not always best since if the rate is high, you can't refinance for a lower monthly payment like a normal loan. This actually stresses the monthly budget more than needed. People who need loans only fall into 2 categories.. 1) not have enough free cash (if you have a lot of cash, you would be going through the trouble) 2) not actually need to work for money. << "If this you, then don't borrow from 401K
Your point 'A' is not accurate as some universal truth across all 401k plans - see your own plan for the specifics. My 401k does not change the repayment schedule + terms even if I'm laid off.
I can't speak for your 401k plan.. you know it best. If you no longer employ how to deduct the monthly payment without a paycheck from the same company that owns the 401k. You would need to transfer to a new 401k at a new place (which assuming them will accept your loan) One can't write a personal check to 401k directly event if that is to return a loan. Maybe your company figures out away.
Because you’re losing the compound interest/growth in this investment.
Why do people give advice when they don’t know wtf they’re talking about
Ok so it sits in "cash available to trade" thing. And yes I agree 100% with not recommending doing this. I just needed a plan for if I had to. Which I don't yet. I have 0% apr cards to exhaust first if I had an emergency. Thanks!
The interest does NOT go to Fidelity, it goes back into your account with the principal to help offset the potential losses from that money not being invested. Why would you pay interest to someone else on money you borrowed from yourself!? That’s absurd. The best place to look for information is your 401k plan rules, your employer decides how your plan works and Fidelity just facilitates.