Credit trap

[Indy Coug]

Correct me if I'm wrong, but don't you also lose an equity increase during that time? Doesn't the plan essentially sell your investment position to pay you the cash, so while you are paying yourself interest you lose out on equity gains?

Yes, this my understanding.

[Joe Public]

The bad thing is that you are double taxed on the interest.

Assuming a person is going to pay interest on a loan either way, I wouldn't place too much significance on that factor.

No I don't. I especially sure as hell don't want to distribute the wealth to them because they have made such stupid decisions and some guy who has saved all his life and gone without luxuries is asked to cover them. Cover them by having his taxes go up and their's go down.

Amen.

[byu71]

There are definitely risks, but the upside is access to cash at low rates you wouldn't likely be able to get through a bank or credit card.

I guess if you have an emergency and you are tapped out on your home equity line of credit.

I would guess more often someone has presented a much better investment opportunity than one can get in their 401K.

Later all they have is a loan against their 401k.

[Indy Coug]

I guess if you have an emergency and you are tapped out on your home equity line of credit.

I would guess more often someone has presented a much better investment opportunity than one can get in their 401K.

Later all they have is a loan against their 401k.

Don't get me wrong, I don't think a 401k loan is much better than a last-resort option.

[Sullyute]

Don't get me wrong, I don't think a 401k loan is much better than a last-resort option.

Agreed. Back in the day I worked in the retirement department of a major financial company. We handled the retirement plans (403b & 457 plans specifically) for 100's of non-for-profit companies. Most of them were hospitals, colleges, and school districts. It was amazing to see teachers and nurses who had amassed hundreds of thousands of dollars in retirement savings with small steady contributions over decades of employment.

Then there were those who would get a few thousand dollars in retirement savings and then take it out in a loan. There were some plans that allowed employees to have multiple loans, and people would be carrying 3 and 4 loan payments to their plans. They would have to stop making regular contributions just so that they could make their loan payments. They took loans for everything and anything you can imagine. I always thought it was smart (but a bit big brother) of the plans that did not allow loans or hardship distributions. It was a penalty on the conservative employees but a long term benefit for the majority of the plan participants.