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

[roseofsharon71]

@nikki225 Like the others mentioned you would have to have some horrific funds in your 401k to even consider this. I’m willing to bet there probably a few decent large cap with ratios less than .5 that you could be putting money into rather than trying to lose your retirement trading outside of it. Or find an employer that offers a PCRA so that way you can invest in whatever you want anyway.

 

[mino]

@nikki225 Assuming your 401k has an SP500 matching etf like SPY or VOO, I highly doubt on a long enough timeline you can consistently beat SP500 returns by more than 5%. Not impossible, just very unlikely.

 

[mino]

@nikki225 Yeah man, don’t let the haters get you down. Reddit is supposed to be a place of open mindedness where you can ask questions and get real answers, but recently it seems like it is a lot of angry trolls.

I have considered trading on margin which is similar to what you are talking about, and looked at leveraged etfs and things like that, but personally I see the risk as too high. If you get stuck on a down year, it can be exponentially painful.

 

[seeker504]

@nikki225 One nice thing about this exercise is that it is very easy to model and compare your scenarios and see if you can come out ahead. If you don't have the ability to do that you are likely just gambling. I'm starting a new comment instead of responding to the old because here are some additional thoughts.

It can be a really good idea to take a 401(k) loan if you are looking at non-traditional investment that is unavailable in a 401(k). It is still risky, but say you wanted to take a $25k 401(k) loan today to buy an original Basquiat print, and you know a lot about art and the secondary market and you have the ability to judge etc. etc. all the caveats. The point is, you are investing the money in a substantially different area than the market. Then, if market performance is poor you can really come out ahead - instead of taking a 10% loss on the $25k you get a 5% gain from the interest you pay yourself (though you have to be careful how you calculate this gain overall) *and* you have the Basquiat. Or, you could make this argument for buying real estate or even REIT, etc. to increase your diversity.

This can apply to something as simple as taking a 401(k) loan and throwing it in an HYSA while you wait out market turbulence, but this is just simply timing the market which if you can do it good on ya but most people cannot.

Of course the other problem is that over the course of the 5 year term of the loan, it gets harder and harder to simply beat whatever funds you have.

If you are simply taking money out of your 401(k) in order to invest it in areas of the market that your 401(k) doesn't cover then you are still at the whims of the market. And it's fine if you want to do that but in this sub you aren't going to get much in the way of endorsement to take a 401(k) loan to buy 50000 shares of your best friend's sister's boyfriend's brother's girlfriend's fuel cell company.

If you say no NO NO NO NO I am a safe investor I just don't like my fund choices in the 401(k) and would rather just take the loan and buy VTI in my brokerage account that is also fine but it doesn't really change your portfolio and risk profile much, while exposing you to some tax liability and the associated job change risks, and it's hard to come out ahead as compared to simply only contributing to get your match and then putting aside more money to invest yourself. This is what your model would be for.

Again, it is certainly possible that your 401(k) choices are so horrendous that this is a great idea no matter what other reservations I state. Like, imagine a 401(k) that only offers municipal bond funds. Then ok, go ahead and use 401(k) loans to diversify. But, I think it's pretty rare that there is literally nothing to choose from that will at least come close to mirroring VTI or VOO, etc.

 

[corbco]

@nikki225 Would you rather save $19,000 a year for retirement, or $6,000?

 

[nikki225]

@corbco How about expanding?

 

[corbco]

@nikki225 Sure. Are you seriously saying, "I'd rather invest only $6000 per year in my IRA, than $19,000 in my 401(k) -- or $25K in both"?

(Hint: If you want to have $1.5 million in your retirement plan when you stop working, putting away $6K/yr ain't gonna get you there.)

 

[nikki225]

@corbco Who said I'm only investing $6000 a year?

My question even says general investment accounts.

 

[mybrainsick]

@nikki225 So your 401k interest is 5%, let’s say the funds offered average 8%. You’ll need to consistently earn 13% to break even, and then another 5-10% to make it worthwhile. Do you really think you can consistently get 18-20% when 95% of active fund managers cant?

 

[nikki225]

@mybrainsick

So your 401k interest is 5%, let’s say the funds offered average 8%. You’ll need to consistently earn 13% to break even, and then another 5-10% to make it worthwhile. Do you really think you can consistently get 18-20% when 95% of active fund managers cant?

Why so restrictive? Earning 13% to break even sure... but why does it have to be another 5%-10%? If I can make 14% that's enough to break even AND make another percentage point.

What's the reasoning of needing another 5-10% to make "worthwhile"

 

[mybrainsick]

@nikki225 Because why not just keep it in your 401k at that point? Let the money grow tax free. Not worth the hassle for an extra 1% and future tax implications. The tax benefits of a 401k far outweigh the 2% from your employer

 

[vheyc]

@nikki225 What happens if your investment account fails?

 

[kyukca]

@nikki225 I did this and it paid. Typical 401k investment offerings are terrible. And if you’re 59 1/2 you don’t need the loan, just roll it all into an IRA while staying in the job, “in service”

 

[jamib90]

@nikki225 Gotta love the answers to this question that obviously have no knowledge of a 401k loan yet decided to answer the question for some reason.

Really shows how little the people on this sub know.

 

[lejetwerkeng]

@nikki225 You would need some quite bad investment options in your 401k for this to make sense - is there nothing like a vanguard all stock fund with expense ratios ~ .03%

While most fund options I’ve always seen in 401ks and HSA are (very) bad for the median investor, there is typically at least fund like that in the bunch

 

[ceecee111613]

@lejetwerkeng My 401k has a few market index funds with very low expense. That is where I dump my free money from the match

 

[seeker504]

@nikki225 Also, you aren't paying extra back into your 401(k) when you pay back the loan. A 401(k) loan becomes it's own entity. You are paying back the loan, not contributing to your 401(k) (the loaned part of the 401(k) is no longer invested).

So you have to beat what your funds would make to come out ahead. It's not like you are leveraging to get even more returns as some people seem to think.

Once again, you seem to be banking on your ability to beat the returns of the funds available in the 401(k) by enough to make all of this manipulation worth it.