Mr.Aqua

Hi guys,

I took a 401k loan out 2.5 years ago to put down on a house as I didn't have enough down. I've got another 2.5 years to go on the loan before it's paid off. I have enough liquid in my emergency fund to pay it off now but would take my emergency fund to about 1/2.

My job is fairly stable (as far as I know) and I've been with the company for 8 years. I contribute 10% to my 401k plus I pay back the loan each month to a tune of 500 dollars. The interest on the 401k loan goes back into my account but it does have a 24 dollar annual fee.

Is it smart to lump sum it, my liquid cash is getting me over 24 dollars a year so I'm not technically loosing money having the loan, just the potential opportunity cost if the market going up. I really do not like having any reoccurring monthly bills and would like to see my paycheck come up to where it once was.

Also, if I do get laid off or move companies I would need to pay the loan back in 60 days or get hit on my taxes. I would pay it out of my emergency fund. The only debt I have is a mortgage and a small 2,000 on a 0% credit card and I'm able to save about 2,500 a month so my emergency fund would be replenished in 6 months or so.

Thanks in advance!

Aqua

Heyitsgary

I would think you'd want to get this paid off as soon as possible. The $24 fee and even the interest paid is likely NOTHING compared to the possible gains even at moderate rate of returns in the account.

**Disclaimer - I'm not a financial adviser, analyst or anything else. I didn't stay in a holiday inn last night. I just think logically and believe my statements accurate until corrected.

Chris S

It depends on what else could/would you do w/ the money set aside for repayment.
1) buy residential rental property?
2) fund 2014 and 2015 Roth max contributions? (5500/yr)

Those would be my top 2 alternatives.

silvermonster

hey chris. Can you contribute both to the roth ira and 401k.

Example, if I were to max out my 401k which is 17, 500. can I also open up a roth ira of 5500 dollars?

is the tax write off only for 17,500 or would it be 23000?

Or should I put in 12000 in the 401k and open a 5500 roth ira?

anyways, let me know what you think. Thank you for your help.

silvermonster

opps, had a brain fart, roth ira isn't tax deduction only traditional ira.

I'm assuming the max anyone can deduct is 17,500?

would it make sense to open a roth ira as well?

Chris S

I'm not a big fan of 401k's personally, and am now only investing up to my company's max match of 4% in a Roth.

If you have the spare cash, go ahead and put $5500 annually in Roth contributions - you can always get your principal back tax-free, and earnings will be tax-free starting @ 59.5.

One thing I hate about trad 401k's/IRA"s is you'll be paying ordinary income rates regardless of how your contributions grew, missing out on lower LT cap gains and div. rate benefits.

Gen0ss

All I had to do is read your first 2 paragraphs....
1. NEVER take a loan from a 401K. That money is protected in bankrupcy. Which brings me to #2...
2. "my job is fairly stable" Refer back to #1!!! Pay that shit now homie.

chi.ted

If you have the cash and will still have enough in reserves, pay it off. Interest rate or annual fee aside, as someone mentioned before the big loss is potential market return, as these are all long term funds for retirement.

And if anyone is thinking about taking out a 401k loan; since most people sign up for Trad 401k (pre-tax earnings contributions), the loan is paid back with AFTER tax paycheck dollars, and then when you withdraw them at retirement you are taxed again as ordinary income. So yeah, double taxes paid on loan amount.

jkelley

^This.

With one caveat/alternative: You can change your contribution options and put in only the minimum amount to your 401k to take advantage of any employer matching or options and then redirect that difference (2%? 4%?) to paying off the loan faster. Putting money into both is counter-intuitive at this point. But always take advantage of your company's matching (I'm sure you already know this though).

Mr.Aqua

Thanks for all the responses. Quick update: Paid back the 401k loan with savings and then saved up another large sum for my 8 month emergency fund. I'm glad I paid it off sooner than later as I left my previous job and took another which would have resulted in liquidity my savings anyways to pay it back. So now I'm in a much better spot and able to max out my 401k, Roth-IRA and HSA.