I saw, we can borrow money either 50k or half of the savings (whichever value is lower) from the 401k account. Currently i am saving downpayment for house purchase, and have $25k in my 401k. Does it make sense to put 25k more and then borrow money from 401k. Living in CA so pretax money is very valuable
I purchased my first house in Bay Area last year and took out 401k loan for my deposit. Definitely better than borrowing additional from the bank, which also related to your mortgage rate and other factors.
Make a spreadsheet.
It’s only better to borrow from 401k instead of the bank if the mortgage interest rate is more than you anticipate the 401k investments growing per year.
I am not 100% sure abt this, somebody correct me if i am wrong. When you return the borrowed money from paycheck, it actually comes from after tax amount. So essentially the amount going to returning the borrowed money is not tax deferred any more. I borrowed a little just fir the geck of it and noticed this. Google for more info.
The principal you return is not taxed twice. You borrowed 50K, you returned 50K. It is still pre-tax money. The interest you pay to yourself is taxed twice.
You can only put in $18.5k of pre-tax money each year.
Keep in mind that you have to repay the loan immediately if you leave the employer. There is an opportunity cost as the money will stop growing. The principal you return will not be taxed twice, but the interest will.
There are many companies that are moving away from this policy. I was able to keep making loan payments to my 401k after I left my job at DellEMC.
You're gonna take out pre tax money, put in post tax money as a loan to yourself. That's fine, but it would also mean you're going to stop the growth of your 401k (6% per year approx) for an interest rate of 4% that you might be paying to a lender. It is your choice but generally, lender would be preferable over borrowing from 401k
You also have to consider the fact that the interest you pay for a 401k loan is double taxed - once before you pay it and once when you withdraw from your 401k in retirement. Factor that in along with the opportunity cost (missed 401k growth).
What about the advantage of paying the interest back to yourself and not the bank?
Um.. are you sure it's not 50k or half, whichever value is lower?
That is true 50k or half, whichever is lower. I am editing the post