Almost nobody needs an individual 401k. Still, some people are convinced that these things are not tax traps and that somehow everything will work out OK.
If you are the type of person who is convinced that their 401k plan is doing good things for you (and will continue to do so), you might as well get the most out of it. You can do that by just leaving it alone. Don't loan money out of it. Don't even think about borrowing from it for any reason.
First, when you take a loan from a 401k, it's not really a loan, per se. You are withdrawing funds from the plan. Since they aren't in the plan, they are not invested. The investments had to be liquidated so that you could have the money.
Normally, all fixed investments are a loan. You are lending money to the government (T-bills or T-bonds) or a corporation (corporate bonds). Although stocks and mutual funds are not loans and [stocks] are instead partial ownership in a company, you still earn interest from the appreciation of the stock. The return (or interest) generated from fixed interest investments, of course, comes from a borrowing party.
Loaning money to yourself is basically replacing the interest you get from one source with another. That's unfortunate in some respects because the money is not in your account. While this may be good during a market downturn, it essentially represents a higher savings rate with 0% return from investments.
Additionally, the interest you do pay on your 401k loan is subject to double taxation. Why? Because the money is after tax money not subject to the same rules as the original contribution. This is a "double hit" in terms of taxes that you are going to be forced to pay as part of your participation in the plan.
Every time you take a loan from your 401k plan, you repeat the process of building up funds that will be taxed twice. This is incredibly unfortunate and necessary. The gimmick of the plan (the tax savings) can then become nullified through even moderate borrowing throughout your lifetime. This is on top of the regularly required taxes on distribution. - 21511
If you are the type of person who is convinced that their 401k plan is doing good things for you (and will continue to do so), you might as well get the most out of it. You can do that by just leaving it alone. Don't loan money out of it. Don't even think about borrowing from it for any reason.
First, when you take a loan from a 401k, it's not really a loan, per se. You are withdrawing funds from the plan. Since they aren't in the plan, they are not invested. The investments had to be liquidated so that you could have the money.
Normally, all fixed investments are a loan. You are lending money to the government (T-bills or T-bonds) or a corporation (corporate bonds). Although stocks and mutual funds are not loans and [stocks] are instead partial ownership in a company, you still earn interest from the appreciation of the stock. The return (or interest) generated from fixed interest investments, of course, comes from a borrowing party.
Loaning money to yourself is basically replacing the interest you get from one source with another. That's unfortunate in some respects because the money is not in your account. While this may be good during a market downturn, it essentially represents a higher savings rate with 0% return from investments.
Additionally, the interest you do pay on your 401k loan is subject to double taxation. Why? Because the money is after tax money not subject to the same rules as the original contribution. This is a "double hit" in terms of taxes that you are going to be forced to pay as part of your participation in the plan.
Every time you take a loan from your 401k plan, you repeat the process of building up funds that will be taxed twice. This is incredibly unfortunate and necessary. The gimmick of the plan (the tax savings) can then become nullified through even moderate borrowing throughout your lifetime. This is on top of the regularly required taxes on distribution. - 21511
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