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Old September 27 2013, 02:34 AM   #31
Mr Awe
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Re: Financial Planning

Gryffindorian wrote: View Post
A 401K loan, whether you're for or against it, is still much BETTER than using credit cards for emergencies or unexpected large purchases. You're "borrowing" your own money, and the finance charges are a small fraction of what the bloody credit card companies charge. The payment deductions get taken out of your paycheck, although you may have to pay loan initiation and maintenance fees, which are quite minimal. So it's a win-win situation.

The only drawback that I can think of is that your take-home pay is considerably smaller, depending on the amount and term of your 401K loan. Right now I'm having to pay $500 per paycheck back to my loan. Ouch!
Like I said, if you must do it with retirement money, use a Roth IRA not a 401k for the reasons I stated. Although, I know it's too late for the current situation.

And, the other huge drawback is that you won't have as much money for your retirement.

I can understand the surprise emergency but it should be a last resort, and preferably from a Roth IRA.

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Old September 27 2013, 03:46 AM   #32
DonIago
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Re: Financial Planning

Well you still end up with more in your 401(K) than you took out since you do pay interest on the loan which in turn is dumped into your plan. It may not be as much as your holdings would have paid on their own, but it's something.

I would think, given the choice, a 401(K) loan would be less of a last resort than ratcheting up a credit card balance.

I concede that there is the caveat that if you leave your job then you're faced with either paying the remaining balance immediately or having it turn into a distribution.
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Old September 28 2013, 04:21 AM   #33
Yoda
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Re: Financial Planning

I've always been reasonably solid in managing my finances. I have a pretty good income now so it's fairly easy, I can max out my 401k contribution, indulge in my hobbies, and still have money left over.

But 7 years or so ago when I was struggling to find good work to make use of my Comp Sci degree, and was working as a video game tester I still managed to save money. When I lost my pretty bad testing job and ended up at bottom of the barrel next to guys right out of high school testing job, I downsized from sharing an apartment to renting a room in a house, and still saved. Not a ton of money, but still.

On the other hand, the people I know who are in debt... their income doesn't matter. When they're not making much money, they spend it all, and then some. If they get a new job that pays more, do they pay off their debt? Nope, they immediately find a way to spend it. Some even pile on more debt. Others just stabilize it, but for reasons I can't figure out people don't pay down their debt when they have the ability to do so. It makes no sense to me.

A friend of a friend is the worst example of this. He doesn't work, he lives off of benefits. But he also lucked out and has some mineral rights in North Dakota or something, which results in him getting a check every month. Now granted, this income would put him off of benefits, but he doesn't report it, pay taxes or anything. So, he's evading taxes and defrauding government assistance programs. Ignoring all that.. the mineral rights check varies based on how much oil they pump out of the ground in a given month. So it is anywhere between $1,500 and $5,000. But, it doesn't matter. No matter the size of the check, he spends every last penny, and is completely out of money before the next check gets there. He has $5,000 dollars this month? Time to buy the gf some jewelry, time to buy a new TV, time to trade up on the car, time to go on a trip!

That's not to say I'm perfect, I have some flaws in how I manage my money. First of all I spend way too much money eating out. I need to come up with a learn-to-cook plan of some sort. It would help from a health standpoint as well. I also do a bad job of investing, the 401k is nice and easy... but aside from that my money is rotting in a very low interest. There's a lot more in there than I need for emergencies, so I really should figure out a way to make the rest of it work for me. Part of it is me being risk-averse, part of it is me thinking it is a soon-to-be down-payment on a house, but the market has rebounded a bit, and even when it was at its bottom I still couldn't quite afford something that I would actually want to own.
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Old September 28 2013, 06:58 PM   #34
Mr Awe
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Re: Financial Planning

^ Much wisdom you have Yoda!

It's true, debt tends to be based more on spending habits than income. Some people will tend to be savers or in debt regardless of their income.

If you have extra money for investing after your 401K, look into Roth IRAs. This can be as easy the 401Ks where money goes in them automatically each month. Anything you put it, you can withdraw without penalty or having to pay back.

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Old September 28 2013, 07:43 PM   #35
Gryffindorian
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Re: Financial Planning

Mr Awe wrote: View Post
Gryffindorian wrote: View Post
A 401K loan, whether you're for or against it, is still much BETTER than using credit cards for emergencies or unexpected large purchases. You're "borrowing" your own money, and the finance charges are a small fraction of what the bloody credit card companies charge. The payment deductions get taken out of your paycheck, although you may have to pay loan initiation and maintenance fees, which are quite minimal. So it's a win-win situation.

The only drawback that I can think of is that your take-home pay is considerably smaller, depending on the amount and term of your 401K loan. Right now I'm having to pay $500 per paycheck back to my loan. Ouch!
Like I said, if you must do it with retirement money, use a Roth IRA not a 401k for the reasons I stated. Although, I know it's too late for the current situation.

And, the other huge drawback is that you won't have as much money for your retirement.

I can understand the surprise emergency but it should be a last resort, and preferably from a Roth IRA.

Mr Awe
I don't even know the difference between a regular 401K and Roth 401K. How is it that you could borrow without paying back?! Wouldn't that be considered a withdrawal? That would mean paying hefty taxes and penalties.
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Old September 29 2013, 12:49 AM   #36
the 4th Hanson bro
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Re: Financial Planning

DonIago wrote: View Post
My 401(K) plan lets me takes out loans against it, and I have to say paying yourself back at a low APR beats the hell out of paying pretty much anyone else back at a probably higher APR.
The money appears to be cheap to borrow, but there's some additional costs that people don't think of. Often times, the only contributions that can be made are loan repayments. So not only did you take a percentage of your capital out, you're not adding to the balance only bringing yourself back to even. The potential investment return lost often outweighs the low interest on the loan.


DonIago wrote: View Post
Robert Maxwell wrote: View Post
DonIago wrote: View Post
My 401(K) plan lets me takes out loans against it, and I have to say paying yourself back at a low APR beats the hell out of paying pretty much anyone else back at a probably higher APR.
Really sucks for your retirement, though!
I don't see much point in having $50K saved up for retirement if I have no money to pay for car repairs.
That's why one should have a true emergency fund in a savings or money market account that one DOESN'T TOUCH unless it's a true emergency. And a vacation or new car are not emergencies.

One needs to have short, medium, and long term savings. A budget is a nice first step, because without knowing what's coming in and going out, it's impossible to know anything else. But any budget that doesn't include savings as a fixed, non discretionary expense each month isn't really worth much.
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Old September 29 2013, 02:22 AM   #37
DonIago
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Re: Financial Planning

the 4th hanson bro wrote: View Post
DonIago wrote: View Post
My 401(K) plan lets me takes out loans against it, and I have to say paying yourself back at a low APR beats the hell out of paying pretty much anyone else back at a probably higher APR.
The money appears to be cheap to borrow, but there's some additional costs that people don't think of. Often times, the only contributions that can be made are loan repayments. So not only did you take a percentage of your capital out, you're not adding to the balance only bringing yourself back to even. The potential investment return lost often outweighs the low interest on the loan.
That may or may not be the case oftentimes, but it's not the case in my...er...case. I can both have an active loan and continue to make normal contributions.

Obviously anyone considering such a loan should review the conditions carefully before committing to it.
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Old September 29 2013, 04:32 AM   #38
propita
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Re: Financial Planning

A Roth IRA is not a 401k.

There are people here who can post the actual differences, and likely correct what I'm posting, but I don't think I'll be too far off, just overly simplified and incomplete:

A 401k--or 403b for some institutions--is a pre-tax retirement account, often partially matched by the employer. You get a tax savings because your taxable income is lowered.

An IRA is a pre-tax retirement account that is unrelated to an employer. If you contribute to a 401k, you cannot contribute to an IRA also. if your spouse is not working, s/he can contribute to this and you will get a tax savings.

A Roth IRA is an after-tax retirement account that is unrelated to an employer. If you contribute to a 401k, you can contribute to a Roth IRA up to the annual cap. You don't get a tax savings upon deposit, but interest is tax-free (for now, at least).
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Old September 30 2013, 02:19 AM   #39
Gryffindorian
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Re: Financial Planning

^ Thanks for the clarification. My 401K account is through my employer, but I pay the full contribution, meaning my employer doesn't match what I put in every pay period.

On the other hand, since I'm a civil service employee, we have a retirement system funded by working employees. The current contribution rate is currently at 6%, but management is pushing to have it increased progressively to 8.7% within the next few years.
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Old September 30 2013, 07:13 PM   #40
Mr Awe
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Re: Financial Planning

Gryffindorian wrote: View Post
I don't even know the difference between a regular 401K and Roth 401K. How is it that you could borrow without paying back?! Wouldn't that be considered a withdrawal? That would mean paying hefty taxes and penalties.
Yes, it's a withdrawal. But, no, as long as you only withdraw what you put in (but not withdraw the earnings), you don't pay taxes or penalties.

Knowing stuff like this is why it's important to understand your investment options.

And, to be clear, I'm NOT talking about Roth 401K. I'm talking about a Roth IRA.

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Old September 30 2013, 07:31 PM   #41
Mr Awe
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Re: Financial Planning

the 4th hanson bro wrote: View Post
DonIago wrote: View Post
My 401(K) plan lets me takes out loans against it, and I have to say paying yourself back at a low APR beats the hell out of paying pretty much anyone else back at a probably higher APR.
The money appears to be cheap to borrow, but there's some additional costs that people don't think of. Often times, the only contributions that can be made are loan repayments. So not only did you take a percentage of your capital out, you're not adding to the balance only bringing yourself back to even. The potential investment return lost often outweighs the low interest on the loan.
Great points. There's also the fact that you take out pre-tax dollars but you have to repay it with dollars that you've paid tax on.

So, say you borrow X dollars. To repay it you have to earn X + Income tax on X. So, you're losing the income tax part. You then have to pay income tax on it again when you withdraw it upon retirement. You pay double the income tax on what you borrow.

Normally you just pay income tax upon the withdrawal during retirement.

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Old September 30 2013, 07:34 PM   #42
Mr Awe
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Re: Financial Planning

Gryffindorian wrote: View Post
^ Thanks for the clarification. My 401K account is through my employer, but I pay the full contribution, meaning my employer doesn't match what I put in every pay period.

On the other hand, since I'm a civil service employee, we have a retirement system funded by working employees. The current contribution rate is currently at 6%, but management is pushing to have it increased progressively to 8.7% within the next few years.
It's usually recommended that if you employer doesn't provide a match for a 401K, you should invest in a Roth IRA. You get more flexibility amongst where to invest, including very low fee investment houses. Also, you get the withdrawal benefits that I described.

401Ks are best when your employer matches and you should invest up to the full match amount.

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Old September 30 2013, 09:29 PM   #43
Kirby
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Re: Financial Planning

Before you take a 401k loan make sure that it doesn't have a due upon termination clause in which if you leave employment (either voluntary or involuntary) that the entire loan amount comes due upon separation from the company. You could end up paying some big penalties if you don't.
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Old October 1 2013, 06:51 PM   #44
Gryffindorian
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Re: Financial Planning

This Wikipedia table shows comparisons among different retirement plans.
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