401k loan question

[ea1776]

I'm going to check with my 401k provider about this, but wanted to get a general response from the forum.

When taking out a 401k loan, does the 401k balance have to be liquidated or in the form of cash, or can it remain in whatever funds/equity/bonds it's currently invested in?

Also, where does the interest you pay on the 401k loan go, in the pockets of the 401k provider or somewhere else?

[jIM_Ohio]

The interest you pay is treated as a deposit into your account.
There is probably a loan origination fee which will be kept by your 401k provider.

The money you borrow is taken OUT of the 401k. If you had 10k, and borrowed 3k, you will see a 401k balance of 7k and a loan balance of 3k. As you pay the loan back the 7k increases and 3k decreases. The interest paid will increase the 7k as well.

This is a bad time to take a loan- market is down. You would be selling low and buying high, which is a good way to go broke. I would find another way to come up with money, if possible. Or make sure loan is paid off in one year or less (so you are fully invested when the market rebounds).

I have taken 2 401k loans out when I bought my condo in 2000 and new house in 2005. In 2005 I was much smarter about it, I took loan out for 13 months and had it all paid back well before then. In 2000 someone told me to keep loan period as long as possible (bad advice) and that is going to be paid off next month.

[ea1776]

Does repayment typically just happen as your "regular" contributions go into the account, or do you have an extra loan bill to pay?

[jIM_Ohio]

Originally Posted by ea1776

Does repayment typically just happen as your "regular" contributions go into the account, or do you have an extra loan bill to pay?

Mine was thru paycheck both times.

[ea1776]

So say you are contributing 10% income pre-tax out of paycheck, then you take out a 401k loan for 20k.

You are saying that you continued contributing 10% pretax to pay off the 20k loan?

Or did you pay the 10% PLUS some additional amount to pay off the loan?

Thanks for your help!

[sweeps]

The loan payoff is separate from your regular contributions to the plan.

Edited to add: Note that the loan payback is after-tax whereas your contributions are typically pre-tax.

[ea1776]

Ok, thanks for the helpful info.

I suppose they offer different payback options (slow/fast) as jim eluded to?

Anybody know the range for that? Suppose I borrow 10k. What would be some typical monthly payback numbers?

[jIM_Ohio]

You need to check your plan. It will depend on the interest rate. I borrowed 7k the first time and had $50 payment spread over 8 years. I borrowed 20 or 30k the second time and paid that off in 13 months (payments were in excess of $1000 per month).

Loan was paid in my case by basic interest/ ammortization calculations.

[InDebtInDC]

Originally Posted by ea1776

When taking out a 401k loan, does the 401k balance have to be liquidated or in the form of cash, or can it remain in whatever funds/equity/bonds it's currently invested in?

Each fund administrator will have their own set of rules. No one else can answer this.

For me, I do not have the option to hold the balance in cash so it doesn't apply for me.

Originally Posted by ea1776

where does the interest you pay on the 401k loan go, in the pockets of the 401k provider or somewhere else?

A portion will go to the loan administrator, but most will go back to your own account. You are paying yourself back. Check with your plan administrator.