David Bach On 401K Loans

by James on May 28, 2013 · 9 comments

Hi All,

Since 401K loans have been getting a lot of ink in the personal finance blogsphere, I wanted to take a moment to throw up a quickie video by David Bach on 401K plans. At 3:30 seconds its a quick watch so you can check it out at on your break at work.

If you aren’t able to access the video, the main points are:

1. Don’t borrow against your 401K unless it is for the purchase of a home.
2. Pay the loan off as soon as possible.
3. If you lose your job, you need to pay the loan back in 90 days. If you don’t pay the loan off, it is considered a withdrawal. Withdrawals are subject to a 10% penalty and may increase your tax bracket
4. All 401k plans have good investing options. If you don’t know what to invest in, go to your HR plan to find out the investment company representative.
5. Most 401K plans have a fee only advisory service built in, so you can probably get some good free advice.

As a quick side note – In general in can’t go wrong with David Bach. However much of what David has to say is conventional wisdom, which will make you comfortable and secure, but probably not fabulously wealthy. If you want to get rich quick, you’ll have to look elsewhere.

Best,

James



{ 9 comments… read them below or add one }

1 Free Money Minute May 28, 2013 at 7:16 am

I would not recommend even borrowing against it for your home. The reason is because if you lose your job, you must pay it back within 90 days or it will be treated as a withdrawal and incur a 10% penalty plus your marginal tax rate.

2 John S @ Frugal Rules May 28, 2013 at 12:25 pm

I like to never say never, though I would be hard pressed to see a time where I would choose to borrow against a 401k…even for a home purchase. If it was for a short term situation and was simply waiting on an influx of cash I might then, other than that there are just too many risks in my opinion.

3 DC @ Young Adult Money May 28, 2013 at 12:40 pm

I think borrowing against your 401k is fine if you know the terms of repayment, the risks, etc. It may be a better option than other loan options available to you.

4 Christine @ ThePursuitofGreen May 28, 2013 at 5:15 pm

The thought of borrowing from a retirement account just doesn’t sound like a good idea to me. Too many penalties and restrictions. Not to mention that’s your retirement money!

5 James May 28, 2013 at 10:46 pm

@ Christine,

Interesting point…but I do wondering if perhaps you aren’t are a bit too negative on it. Any interest you pay on the loan goes directly back into your 401K accounts, so as far as loans go, it seems far less detrimental to your financial health than other kinds of loans – such as credit cards or pay day loans.

Best,

James

6 James May 28, 2013 at 10:49 pm

@DC,

David, as always, great to hear from you. Thanks for taking the time to stop by and comment.

Okay, one thing I’d add to the discussion is that 401K loans might be less risky if you are younger. For example someone in their 30s might have more time make up any losses on a bad 401K loan than someone in their 50s.

Best,

James

7 James May 28, 2013 at 10:52 pm

@ FFF and John,

Nothing ventured nothing gained!

– James

8 Christine @ ThePursuitofGreen May 29, 2013 at 3:32 pm

Good point James. For me, its really hard saving for retirement, its one of the things I am trying to work on, so I wouldn’t like to take out money from a retirement account since I work so hard to put money in it!

9 James June 8, 2013 at 8:44 pm

Hey Christine,

Really long delay getting back to you – the only thing I would say is keep saving!

Best,

James

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