It sounds like more risk than it's worth. Depending. We'd be guessing at the details, such as:
- What is the company match, if any?
- Do you still get the match while loans are outstanding?
- How much per year do you currently deposit?
- What are the fees (annual expenses) by fund?
First. Always deposit to get the company match. Free money. Let's say the returns are identical between the chosen 401(k) fund and the ETF you choose. You don't seem to gain much. Look at the 5% however you will. A fixed 5% in the acct, and a potentially higher/lower return outside with the same money. Ron's point that you are creating cap gains outside the 401(k) is true, but offset by potential lower taxes at retirement.
I am not a "never-loaner". There are many scenarios where a loan can make perfect sense.
- When the loan bridges the gap between 80%LTV and the current LTV on a potential home purchase, by eliminating PMI.
- When a high interest debt (say 18%+) can be paid off, with the warning that all the behaviours that led to it have been addressed.
- When the choices within the 401(k) have such high fees (there are still those that run 2%), that borrowing out half the value and doing what you suggest is a great idea.
- When a sibling/child needs a vital organ and would have no means to pay on their own. Assuming you like this person.
In the end, without the extra details, I don't see a clear case for this being very beneficial. Nor do I see it being 'bad'.
I'll share. Years ago, I had a mortgage which was relatively high interest, and also a jumbo loan. I used a 401(k) loan to pay it down, and then made higher payments for a year. Then, it was below the 'jumbo' threshold and general rates were lower. Using $50K to drop a $400K+ mortgage's rate by over 1.5% gave me math I was happy with. Just an example.