Let's assume the following:
I need $50K for various expenditures (aka simply spending, not paying off CC debt or putting the money somewhere else).
I can either liquidate regular taxable investments and pay 15% LT capital gains taxes which amount to about $5K in this case. So, in order to keep $50K I'd have to liquidate $55K.
Or I can take out a 401K loan for $50K (repayment 5 years).
Which alternative is better?
Maybe my thinking is incorrect, but it looks to me that taking out a 401K loan is the better option due to the tax effect of liquidating taxable investments.
- FV of $55K in taxable investments over 5 years at 9% annual return (LT S&P500 return) = $84.6K
- FV of $50K in 401K over 5 years at 9% annual return = $76.9K
The delta between 1 and 2 is of course the FV of the capital gains taxes (same 5 years, same 9% return) I avoid by taking out a 401K loan.
I'd argue that the fact that the 401K loan needs to be repaid does not matter here. Nor does future tax treatment for the taxable investments or the 401K -- basically, the money is where it is.
Is it really that simple? What am I missing? Seems to fly into the face of the many articles that say "never take out a 401K loan".
Thanks for your critique! ;-)