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Although paying off a loan to your 401k most likely comes from post-tax sources, if you merely wanted to move more money into your 401k than would otherwise be possible, doesn't this accomplish that?

Since the 401k is a valuable entity in own regard, there can be several reasons why it would beneficial to get as much funds as you want inside of it.

The higher the interest rate the better, so it seems that - in this scenario of merely wanting more inside of it - it is worthwhile to have at least 1 loan being paid off of a 401k any given year. Since ideally the value of the 401k will also be going up from normal contributions and market appreciation, the next loan can be bigger. The best scenario seems to be paying off a $50,000 loan annual.

This math exercise is intended to be independent of the average salary of the population.

A) Does this accomplish the goal of routinely getting additional funds into a 401k?

B) Could one force the interest rate to be much higher than prime rate?

  • There are numerous reasons why taking a loan from a 401(k) plan is not a good idea, and the reason that you think it is a good idea is not borne out when one goes through the math exercise. And no, you cannot "force" the interest rate that you have to pay to be larger just so that you can get a lot more money back into the 401(k) plan. If that were possible, people who can afford it would be insisting on taking a loan from their 401(k) and returning with exorbitant amounts of interest as a way of boosting the 401(k) assets far beyond what could be achieved via normal growth of 401(k) assets – Dilip Sarwate Jun 15 '17 at 15:52
  • @DilipSarwate you didn't disprove it though, yes there are negative aspects to taking out a 401k loan, such as having to pay it back if you lose your job or getting taxed+penalty, having to most likely pay it back with post-tax mony, but are there negative aspects to merely getting more money in the 401k? even normal prime rate is enough. – CQM Jun 15 '17 at 16:01
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A) Yes, it does accomplish the goal of adding more money, but the money is in lieu of any return you can earn while the loan is outstanding. If you somehow knew exactly which periods where going to run negative, and you took a 401k loan during that time, you'd be in pretty good shape, but if you had that information you'd probably be ruling the world in short order and wouldn't care much about a measly 401k.

B) It's a nice idea, but unfortunately you are not allowed to set your own interest rate. (If you could your idea would work perfectly.) The interest rate is bank specific, and is typically 1-2 points over prime. But if your plan was to leave your money sitting in cash or low interest bearing accounts anyway, the loan does actually achieve the goal of "getting more money in there". Though it's your money; you aren't "earning" it.

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    That second clause of the first sentence is key. When you take a 401(k) loan, the loaned portion is not invested and growing. – Wesley Marshall Jun 15 '17 at 16:43
  • @WesleyMarshall unless it is. – CQM Jun 15 '17 at 17:11
  • Yes, it does accomplish the goal of adding more money okay thanks! glad I didn't miss anything. The benefits of 401k's aren't limited to their tax advantages and tax deferred growth, and all the routine advice you added assumes thats their only benefits. Given the expectation of prime rate increases, starting a new loan every year or two seems to be optimal – CQM Jun 15 '17 at 17:12
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    @CQM you mean if you take out a loan and invest it in a separate brokerage account? I meant inside the 401(k), but hadn't considered investing the loaned money elsewhere. – Wesley Marshall Jun 15 '17 at 17:18
  • If your 401k portfolio return is greater than 1-2 points above prime, aren't you reducing the balance of your 401k by taking out the loan? – xiaomy Jun 15 '17 at 18:32

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