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Is it sensible to borrow from a 401K to fund an IRA (traditional or Roth)?

I am aware of the downsides to borrowing from a 401K plan but if the principal is low and the maturity short (and no other options) it seems like a good idea (i.e., no net reduction in retirement savings).

  • 7
    What's your angle here? Are you just trying to extend the time that you have to make your IRA contribution? You have no net gain in retirement savings here either, and you're probably going to have to pay some sort of service fees on that load in addition to other risk. It's hard to see what you think you will gain. – user32479 Oct 21 '15 at 20:53
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    I'd also ask what the angle is? Even if you could get a zero-interest, zero-fee loan -- which seems unlikely -- what do you gain by loaning money from one account to another? If you have an IRA that is getting better returns or is otherwise better, why not just roll the money over from the 401k to the IRA? Maybe I'm just missing the point here. – Jay Oct 22 '15 at 4:58
  • @Jay In-service rollovers from 401(k)'s into an IRA generally are not permitted. – Dilip Sarwate Nov 10 '17 at 20:11
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Keep in mind that you can contribute to a 2015 Roth/IRA until 4/15/2016. The same holds true for subsequent years.

I suppose that there is a very small set of circumstances that could be contrived where it makes some sort of sense to do as you ask. However, a lot of special conditions would need to be meet, and even if they were meet would an extra 11K in retirement really move the needle that much?

So I would say no. One thing you do not seem to be tracking is that money borrowed from a 401K is not in the market, so there is some opportunity cost. Not as much in this case as presumably you are reinvesting the full amount borrowed.

You said you were aware of the 401K loan downsides, but it does not seem the degree of risk is registering with you.

  • Yes, the tax consequences are well known to me; and all of the money is going from the 401K to the IRA; so the opportunity cost will be low. – Peter Krieger Oct 29 '15 at 0:27
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There are several potential gotchas:

  • The loan will be repaid with after tax funds. The money pulled out of your paycheck to payback the loan will not reduce your taxable income.
  • You need to verify that you can continue to make contributions to the 401K while you have a loan. If they block contributions you will miss out on the matching funds.
  • verify the provisions for the loan rate and any fees. They may not be as competitive as you expect.
  • If you lose your job, or quit; you will have to quickly payback the loan, or you will be in default. Being in default can have tax implications.

If the company does allow contributions to continue, do you have a plan for handling your 2016 401K contributions, the 401K loan, and the 2016 IRA contributions?

  • Well aware of all of the details you mention; but please note that all credit is paid back w/ after-tax dollars (even mortgages, but you can claim the interest). – Peter Krieger Oct 29 '15 at 0:28
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If:

  1. You are up against the contribution deadline AND
  2. Your contribution moves you to a lower tax bracket AND
  3. You expect to receive funds that you can use to quickly repay the loan AND
  4. The tax savings outweigh the loan costs

It probably makes sense. You should do the math before you take out the loan.

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Yes, a huge savings on taxes possibly. 2019 if married u can make 24k and pay zero income tax. If u make 29k you will pay 10% on 5k, 500 bucks in federal income tax. You borrow 5k from 401k. Deposit in IRA you now have 5k writeoff, so your taxable income drops back to 24k. Saved 500 dollars. No missed market cause your back in with IRA. All intrest on loan goes to your 401k account. Only charged fees. As long as you dont go over what your tax liability would be in fees, this is a great way to save more, pay less taxes and contribute more to your 401k ( interest on loan)

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