Ideas about getting a loan against a 401k

[Cody Stone]

I have recently thought about getting a loan from my 401k to buy an investment property. What I learned is I can pay a $50 fee and have 4% interest rate. The interest I pay goes directly back in to the 401k. In essence I pay myself the interest. Pretty cool, but what I also learned was the monthly payments I make on the loan is with after tax dollars. So I'm paying taxes on the money twice, pay back on the loan and again during retirement. 

Does anyone have experience with doing this? Any thoughts on if it's a good idea? Pros and cons of loans against a 401k?

Thanks in advance 

[Dmitriy Fomichenko]

Originally posted by @Cody Stone:

I have recently thought about getting a loan from my 401k to buy an investment property. What I learned is I can pay a $50 fee and have 4% interest rate. The interest I pay goes directly back in to the 401k. In essence I pay myself the interest. Pretty cool, but what I also learned was the monthly payments I make on the loan is with after tax dollars. So I'm paying taxes on the money twice, pay back on the loan and again during retirement. 

Does anyone have experience with doing this? Any thoughts on if it's a good idea? Pros and cons of loans against a 401k? 

Cody, here is few things you need to consider:

1. Regardless if you borrow from your 401k or from someone else - you will be paying the loan back with after tax dollars. The loan that you take from your 401k is tax-free therefore you are not paying taxes on it twice.

2. If you take a loan from our 401k those funds are now making 4% interest. However, by taking out the loan you are depleting funds available for investing. If you could use those funds and invest into something and earn say 8% - you'd be better off not taking that loan.

3. The interest you are paying on the loan is paid back to your own retirement account so you are in essence helping it grow and if your money were sitting in a money market earning 0.5% it would make sense to take the loan out and pay interest to your own retirement account instead of some creditor and this would also mean that your 401k is getting guaranteed 4% interest.

All of the above and more need to be taken into account in order to decide if this would be sound financial decision.