Borrow from 401k to invest in a general investment account?

[nikki225]

Had a thought today....

I'm not a big fan of my 401k. The offerings are slim not to mention I prefer my Roth IRA.

So not to leave any money on the table, I do invest in my 401k so my company will match it 50% (up to my 4%) So, I invest the minimum 4% and they match 2%.

So, spit balling here:

I was thinking, "can I get it out and working better for me?"

I am able to take out 2 loans from my 401k and the rate is about 5% ish. So, if I do nothing else but borrow as much as I can from the 401k, I will end up putting in 9% and the company matches 2% for a total of 11%.

I mean I am feeding the 401k more money, but I wonder if the funds I would borrow would serve me better in my general investment account. The idea is that I just need to make more out of the 401k than in right?

The more funds I put in, the bigger the next loan can be once the first is paid off.

Or would I be better served putting an additional 5% (loan rate) of my post tax income into my investment account?

EDIT:

At some magic number this is worth while. Would 100% return be viable? of course. Would 50% rate of return work? sure would... would 15%? hmm.. now we're getting down to the real discussion.

Instead of this "OmG yoR GonNa LosE fIV PerCEnT iNTerEst tO thE MaN. THis SuX 4 ThAt REasON aLONe!"

With inflation being a real looming threat to investments, what number does returns have to be in order for this to be interesting?

 

[into_the_wilderness]

@nikki225 Just curious, what are the fund options (with expense ratios) in your 401(k)?

 

[hope321]

@into_the_wilderness This is an important question. The ERs would have to be egregiously expensive to justify investing in a brokerage account over a 401k.

That being said, OP should absolutely never take a loan against their 401k. Just contribute the bare minimum for the match and then make contributions to a brokerage.

 

[matt55]

@hope321

OP should absolutely never take a loan against their 401k.

Are you saying OP shouldn't for this purpose, or no one should ever?

 

[hope321]

@matt55 There could be extreme circumstances where it might be prudent to take a loan against your 401k. Not being a “big fan” of 401ks is not one of those extreme circumstances.

 

[matt55]

@hope321

There could be extreme circumstances where it might be prudent to take a loan against your 401k.

If your only other options are another loan type (credit card, HELOC, personal, etc), selling in taxable brokerage, early withdrawals from a retirement account, or even Roth contribution withdrawals, a 401k loan is usually the most cost effective option.

Not being a “big fan” of 401ks is not one of those extreme circumstances.

100% agree

 

[skim]

@hope321 If the funds are bad enough to contemplate this, OP should remind their employer that they have a fiduciary duty to make sure fees are reasonable for the plan size.

 

[seeker504]

@nikki225 We would need to know a lot more about how bad your offerings in the 401(k) really are. They would have to be pretty bad to make this a good idea in most cases.

The problem with 401(k) loans is when you switch jobs you have to pay it back. Sure, you are investing otherwise, what if your investments aren't doing well and now you can't pay back the loan? Or, you have to take a sizable taxable event to pay back the loan? Etc. This is what makes this stuff hard.

Most 401(k) plans have a low fee S&P500 ish index fund. Just find that, contribute to your max match. Then, put aside extra money for your other investments if you don't care about the tax advantages.

I will be completely honest with you, my read between the lines is you want to take your safe boring 401(k) investments and put more money into being an active trader. That's what makes me most think this is a horrible idea.

 

[eagleflight]

@seeker504 The fact that they haven't even provided us with what their 401k even offers is telling.

 

[kenya123]

@nikki225 That’s a terrible idea.

 

[healedinchrist275]

@nikki225 No. You will not make up a 5% interest in arbitrage.

This is cutting off your nose to spite your face.

 

[pix]

@healedinchrist275

No. You will not make up a 5% interest in arbitrage.

Well, technically it is 5% interest that you are paying to yourself, so it isn't "lost" to a third party.

 

[johnmell]

@healedinchrist275 Typically the interest is paid to yourself and not the 401k provider so this isn’t as terrible of an idea as it sounds off the cuff

 

[nikki225]

@healedinchrist275

No. You will not make up a 5% interest in arbitrage.

You pay yourself the interest when you borrow from a 401k.

 

[ladybug33]

@nikki225 Looked through the thread, not seeing this answer, sorry if someone already covered it.

The interest gets treated as pre-tax, but you paid yourself in after-tax dollars. That's generally why you do not want to do a 401(k) loan unless a life situation is forcing it.

 

[matt55]

@ladybug33 And just to be clear, a 401k loan is generally the best option before other loan types or even selling taxable account assets.

 

[pix]

@ladybug33 What about if you are dealing with a Roth 401k/403b?

 

[jamib90]

@ladybug33 As opposed to a regular loan or any of his other money where.......you also pay in after tax dollars.

 

[ladybug33]

@jamib90 OP is discussing taking a loan to effectively contribute more to a retirement account.

 

[jesusfreakbrian]

@nikki225 You’d have to have some pretty bad options to justify moving money from a tax advantaged vehicle to one that is not.