denim

A few months ago, I was looking at buying a house. I took out $9000 from my 401k to act as downpayment for the house.

Ended up not buying the house. I've got $8K of the $9K left. I tried sending it to the 401k to pay back the loan, but they won't take anything other than the full remaining amount of the loan. Meanwhile, the loan is being pulled out of my paycheck every two weeks, on a 3 year plan. Terms: 3-year term, 5% over the amount of the loan added to the 401k, plus something like $45/6-months to the maintenance company.

So I'll shortly have the $8K check back in my hands. I figure to either bring it back to the bank and cycle it to my index fund, or pull some money out of the index fund to pay off the remaining amount of the loan.

Why pay the loan? I don't like being in more debt than I have to be. I could just put the money in the index fund, but that's playing with differences in interest rates, where the upshot is that I pay myself 5% more into the 401k than I would have otherwise.

Another reason to pay off the "loan", is caution. If I were to lose my job, I'd have to pay the thing back immediately. I don't like having that potentially hanging over my head.

Meanwhile, I have less money to invest or pay off my plastic which is now up to $3K from things which happened in June.

I want both the plastic and the 401k loan gone, w/o pulling more than I have to out of the index fund. Note that the car loan is not involved in this, as I've already decided to leave it alone. Suggestions?

Yakk

Trying to understand the terms.
You pay 90$/year for maintenance fees, which is 1% of principle, but it doesn't decrease as the principle drops.

Any interest on the loan? (ie, money that is lost)

You end up paying 5% more than the value of the loan over 3 years into the 401 k?

I'd be somewhat tempted to pay off your credit cards with it, rather than paying off a probably good-terms loan from your 401 k. Estimate how long it would take to save up enough to pay off the 401 k loan: if a short period of time, put the rest of the money into a safe and flexible interest-bearing investment, put your credit card payments into that investment rather than credit cards, and then pay off the 401 k loan...

If things go badly with your job, you can always use your credit cards to pay off the 401 k loan, and you'd probably end up with less credit card debt than if you paid off the 401 k loan now and kept on giving money to credit card loan sharks.

(I dislike credit card debt)

Is there a time after which you can't pay off the 401 k loan?

__________________
Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.

gar1976

uhhh....

You could be in some trouble on 4/15.

Usually, you can pull up to $10k (IIRC) from your401(k) to finance your first home. However, you dind't buy the house. So....

If you're under 59 1/2, there are two taxable events here. There is a 10% excise penalty for pulling money from your 401(k), as well as the entire amount being taxable income for federal and state. So, assuming a 25% federal tax bracket and a, say, 7% state bracket, this could end up costing you close to half of the full amount ($9,000) in taxes. Not to mention being charged a fee for this.

If you're over 59 1/2, there's no excise, but normal income taxes will apply.

This can be avoided by rolling this amount into an IRA account, ASAP. You'd have 60 days to do so from the date of distribution. Or you can do some math and see if paying off some of your existing loans is worth losing most of your distribution to taxes, but I doubt it.

Or you could try to plead your case to your 401(k) administrator at your job, and see if you can pay off most of the loan with the $8k left. That way, you might only be charged the taxes and excise amount on the $1k you spent on whatever.

denim

So if I pull the remaining amount out of the index fund, and pay off the loan immediately, I'm okay? Or am I still going to get hit for the taxes?

denim

Right.


No interest other than the additional amount going into the loan, which is NOT lost. Right.


The credit card bill isn't trivial, but it's no big deal either. I can pay it off in two or three months.

BonesCPA

What Gar was suggesting is that if you took a distribution from the 401(k), then you would not only be paying the taxes, but also a 10% penalty tax. The penalty disappears if you use it for first time home buying.

However, if you took a loan from your 401(k), which it appears you did since you are having deductions taken out of your pay. then the tax hit won't happen.

As far as the original issue, I always say pay off the highest rate first. You knock off the highest interest rates, and then you have more to pay off the lower interest rate debt later on.

__________________
Back into hibernation.

denim

Hm, it's true that they allow non-house-related loans on this plan. Guess I'll be okay on the tax thing, then.

The credit card balance is all new, so if I pay it off this month, "what interest?", y'know? But I don't think I'll be able to do that. (think)(think) yes, I will!! I'll pull the money from the index fund. OH wait, the index fund shares are a bit low the last few days. Maybe I can start the sequence and they'll go up by Wednesday, which will be the appropriate price date. Can't say fer shur.

gar1976

Sorry, I was reading into it you took a distribution. My bad.

Too much heat over here in my neck of the woods.....