1. I have a 401k balance in the low six figures.
  2. I maximize my contributions every year to the IRS max and my employer has a 6% match. This results in about ~$35k of new money going into my account every year
  3. I see myself as having the option to retire early in about 10 years (I'll be in my mid-50s) but I could also see myself working beyond that, I enjoy my job.

Does taking out a 401k loan serve as a hedge against a falling market? Let's assume that I predict a falling market in the next 2-3 years. All of my read on the 401k loan documents says that the money is effectively pulled from the market and it won't be benefiting from gains. But does the same hold in the other direction? My intuition tells me that it does, that I should be able to limit my exposure because I now have a "smaller" balance. Is that correct? What am I missing here?

3 Answers 3


The general advice is to not try and time the market. I would think that taking out a 401(k) loan based on the idea that the market might go down over the next two or three years doesn't seem like a good plan, even if you are correct in your prediction.

I was going to start with why it would be bad, but then I remembered that in most cases there is no need to do this via a loan.

Most 401(k) programs have a fixed income fund. This type of fund guarantees a level of return. You may find that it returns something similar to the T-bill rates. If you were to pull the money from the 401(k) via the loan mechanism and wanted to keep it out of the market, you would have to put the money in a savings account, CD, or government bind to get some return at zero risk.

Some 401(k) programs let you move the funds beyond a small set of funds, they allow you to invest in individual companies and funds that are sold by their broker.

If you move some money from the stock funds within the 401(k) to less risky investments within the 401(k) you can get the protection you desire at no cost.

The same sort of thing can be done with IRA funds if you want to move to less risky options.

Going back to why a loan would be a bad idea:

  • If you lose your job you need to pay back the loan quicker than you planned, or face tax issues.
  • The maximum amount of the loan is 50% of the balance or $50,000 whichever is lower. So if you want to protect more than $50,000 you can't do it with a loan.
  • Some companies stop the match while the loan is outstanding.
  • Another downside of a 401k loan (or any loan) is that you pay the interest with after-tax money, so you paid tax on money that you don't get to keep.
    – user102008
    Sep 18, 2023 at 23:12
  • 1
    @user102008 "paid tax on money that you don't get to keep" ? The interest goes back into the 401(k), so you do "keep" it; it's just kept in the 401(k) until retirement.
    – D Stanley
    Sep 18, 2023 at 23:21
  • 1
    "Most 401(k) programs have a fixed income fund. This type of fund guarantees a level of return." NO! Fixed income securities guarantee return ONLY if they are held to maturity AND the issuers don't default. (And even then, only nominal, not real, return is guaranteed.) Just because an ETF is "fixed income" doesn't mean it's actually guaranteed income. If the "fixed income" fund is buying bonds with long maturity and selling them before they come due, it can lose or gain money on the change in value of the bonds. Sep 19, 2023 at 3:01
  • @DStanley: The borrower doesn't keep the after-tax interest. The lender (the 401k account) does gain that interest, as earnings in investment in the 401k, but you don't get the benefit of taxes having been paid on the money that the interest is paid from (if it's Traditional 401k, the earnings are pre-tax and you still have to pay taxes on it on withdrawal; if it's Roth 401k, you are not supposed to have to pay tax on earnings anyway). My point is, in either case, the tax is wasted, compared to if you didn't take a loan and put the money in a fund earning the same return in the 401k.
    – user102008
    Sep 19, 2023 at 6:56
  • "The borrower doesn't keep the after-tax interest" yes they do - it goes back into their 401(k). Also, the "double tax" is a myth. You're borrowing from yourself, and you already got a tax break from putting the money in to begin with. Why would you get another tax break from paying that money back to yourself? The tax result would be the same if you had borrowed the money from a bank instead.
    – D Stanley
    Sep 19, 2023 at 13:46

Does your 401(k) have a "stable value fund" or something similar to that name? Most plans have a money market like account for those who desire safety. Interest is typically tied to TBills.

Moving money into something like that provides down side protection without the negative side effects of a 401(k) loan.

Depending on how your provider's 401(k) loan works, it may not provide you with a hedge as you are looking for. It could be treated as a margin loan where your money is left in the investment and money is just loaned to you.


What are you going to do with the money that, after taxes, will reliably produce better returns than simply waiting out your (hypothetical) market downturn?

If you don't have a good answer for that, don't mess with your 401k.

If you do have an answer, check whether you can do it within the 401k and avoid the tax overhead. Most have a pretty wide range of investment options available.

And in any case, beware of trying to time the market. Picking a strategic mix of investments and sticking with it, rebalancing as necessary to maintain that mix, is usually easier and safer.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .