Quote:
Originally Posted by kv968
I think we all agree that borrowing or withdrawing any money from a retirement account should be viewed as a "last-ditch effort" to get money. However sometimes it has to be done but taking a loan out of a 401k is something to be avoided IMO. Taking money from a Roth isn't good either because you can't put that money back due to yearly maximum contribution limits but there are more pitfalls with a 401k loan. Besides the "double-taxation" aspect of it, you also put yourself at great risk if you should leave the company while the loan is outstanding. If you don't pay it back within a set amount of time (usually 60 days) of leaving the company, the loan is then considered a premature distribution and would be taxable and subject to the 10% early withdrawl penalty if you're younger than 59 1/2.
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401k loan vs Roth principal withdraw. Pros and cons to each.
A 401k loan acts like a mid term bond with interest payments being made by borrower to themself. These payments are taxed, the end result is a higher balance in 401k. 50% of a 401k, upto 50k, can be borrowed based on what I've know.
A Roth withdraw is limited to principal contributions, and cannot be replaced (once withdraw, you have 60 days to replace?). The Roth contributions were already taxed.
Pros/Cons
401k
Pros- higher account balance once loan is paid off
higher available withdraw (unless someone has contributed 50k over 12.5 years to Roth)
Cons
Double tax
Roth
Pros
simpler?
Cons
Cannot replace what you withdrew
Lower relative amount you have access to (unless Roth is 12+ years old and you have contributed more than 50k).
I have borrowed from my 401k twice (once for each house we bought).
First loan was 7k over 7-8 years and I regret the term of the loan.
Second loan was 19k over 14 months. Repaying quickly is a huge positive step towards avoiding double taxation over an extended period of time.