I have an outstanding 401k loan for 33k at 5.5%. I wanted to pay it off so not to lose out on the investment opportunity. HOWEVER, the market is crashing and my last quarter 2018 401k statement actually shows thousands of dollars lost. So now I feel like I might be putting money in to be lost in this current economy. SHould I pay it back and move the money to a conservative 401k investment for now? Does that make sense? Important detail: I am considering taking home equity loan (8-9.5% interest rate) to pay off the 401k loan. I am in my early 40s so it's not like I am retiring soon....
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I checked my 401k yesterday. Of the amount lost last quarter, over 30% of it has already been recovered in the next 23 days--so who knows what the market's going to do?– mkennedyJan 24, 2019 at 19:26
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Is the market crashing....... or are you buying it up on the cheap? :D Either way, dollar cost averaging your way into it will both clear the debt, and get your money working for you. It's up to you whether you think you're good enough to time the market. Hint: most traders think they are smarter than average.– ShorlanJan 25, 2019 at 15:48
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2 Answers
Following financial expert Dave Ramsey's Advice, pay back the loan immediately. When you leave your job (whether voluntarily or involuntarily), the amount will be due within 60 days or it will be taxed at your tax rate and penalized an additional 10%. https://www.daveramsey.com/blog/raiding-your-401-k-could-cost-you
As far as the market goes, when it goes down in value, in effect it's like the investments are on sale. Since your a long way from retiring anyway, it won't serve you to put them in "conservative" investments. Bonds are typically considered conservative, but in a rising interest rate market, bond values go down (they are inversely proportional). https://www.daveramsey.com/blog/bad-boy-bonds
If you do use a home equity loan to pay it off, realize you essentially did nothing toward reducing your debt. You are not ahead in any way. All this does is protect you from the taxes and penalties.
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1+1 I have watched my investments in this market. They fell when everything else did, and are almost back to where they were before the crash. Your 401k, ** if properly diversified **, is a long term investment, so short term fluctuations should not be a concern.– pojo-guyJan 24, 2019 at 4:37
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Agreed, it should not be a concern. And yes, all the losses have almost fully recovered recently. Jan 24, 2019 at 5:01
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2Don't pay it back immediately if the only way to do so is a home equity loan at 9%, that'd make things worse..– Hart COJan 24, 2019 at 5:07
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You are correct, Dave would not recommend a home equity loan. He would say cut lifestyle to bare bones and pay it back out of cash flow ASAP. I tried to address his consideration of that option. I think it's a horrible idea to use your homes equity to fix a mistake, but I don't post my opinions as an answer. Since the 401k loan is a debt already, his best bet would be to get an unsecured loan from a bank or credit union to pay the 401k loan, then pay off the unsecured loan ASAP. Jan 24, 2019 at 5:08
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Thanks. I know...taking loan out to pay for a loan seems silly but I thought about this so as not to lose earning potential and tax benefit of my 401k acct (i pay about $700/mo for the 401k loan). As for home equity...I only plan to take out $25000 and figured if i pay the same $700 towards the equity loan, we will be able to pay it off quickly thus minimizing total interest that we would have paid on it. So the question is will the $33k (back in my 401k acct) make more money in the next 5 yrs compared to the the total interest I would be paying on the equity loan in 5 yrs?– CaliJan 24, 2019 at 9:05
A 401k loan isn't ideal, and you should certainly endeavor to pay it off quickly. However, borrowing (especially at ~9% interest) to do so is not a good idea.
The 401k loan interest is paid back to your 401k, not to a bank. If you can afford payments on a 9% home equity loan, you can also afford to pay back your 401k loan more aggressively than you currently are, and that's what you should do. Yes, there's a chance that the market could perform well enough where you'd come out ahead taking on debt to repay the 401k loan now, but there's no guarantee, what is guaranteed if you get a home-equity loan is that you will be paying 9% on that debt.
If you lost/changed jobs, then a home equity loan would make sense to make sure the 401k loan was repaid within the 60-day window to avoid tax and penalty, but otherwise it makes the most sense to simply be more aggressive in repaying the 401k loan rather than paying interest to a bank.
The remainder of your question is more about timing the market, which the vast majority of people are unable to do successfully.
