short-term loan from 401k for rehab

[Gary Parilis]

I'm investigating various options for short-term cash for rehabs. A loan for 401k looks like a good option. Any gotchas to worry about? 

Below are the rates charged in one of my accounts (Fidelity). As I understand it, at any moment, the outstanding loan principle is deducted from my investments (I assume proportionally across all funds), so if I borrow $20k, that is no longer earning in my portfolio. But that's OK, because my 401k is earning 9.325% on the loan (more than it would earn on average in a typical stock fund). And for me, the real estate investor, this is cheaper source of capital than a typical private loan or hard money.

Anything wrong with my reasoning? 

[Brian Eastman]

@Gary Parilis

There is nothing particularly wrong with your logic, but the table you have provided is the wrong set of numbers.  Those look to be the interest your plan would pay for using margin on plan based stock market investments (options, etc.).

A participant loan is a different function of the 401(k) entirely.  Check with Fidelity and see what the features of a participant loan are.  The interest will probably be lower... typically around prime +1 or prime +2.  That may change the opportunity cost math you are using.  You will also be limited to borrowing the lesser of 50% of the plan value or $50K.

There are two issues: the opportunity cost of could the plan be making more than the interest you are paying the plan, and the risk that if your 401(k) related employment terminates the loan becomes due immediately.