How I made money on my 401K while everyone else

[annabella1]

Lost money. There is an option on my 401k that allows you to borrow 50% of what is in there. You have to pay it back with interest. But the interest goes back into the 401k. Now the 401k web site and paper information tries real hard to keep you from doing this. It says that most people when they borrow from the 401k they stop putting money in regularly and they lose money in the long run. What I do is borrow the money, but treat it like a loan from anywhere else and continue making my regular contributions. The money I borrow from myself I use, in making purchases of things I would have to borrow from someone else to do. Last year I bought a used car that my son needed for work. He paid me back with interest and I reinvested the money in an IRA. When I got my statement for the 2nd half of last year, the half of the money I didn't borrow lost 3%. The money I borrowed made 6% for a profit of 3% on everything. I also made interest on the IRA so everyone else at work here was complaining of their loss and I said I made a profit. It also makes more sense to me to invest in myself than in the stocks and bonds and funds that are in the 401k. The money I Borrow from it is also paid back directly from my paycheck so I don't even notice that the money is gone.

[DM]

I kinda did the same thing, when i bought my last two new tractors... Borrowed from myself, and paid myself back!

DM

[I_AM_LEGEND]

I hate to break it to you but you didn't make money like you think you did and I'll explain why but first let me give you my credentials so you don't think I'm BSing you... I worked at Fidelity Investments for a year as a 401K specialist, when customers call with questions or investment changes or contribution changes, I was the one they got on the phone so we had to know 401K's in and out, now I'm a Series 7 licensed financial advisor for AXA-Equitable.

When you took that loan out you can take out up to 50% of your account value or $50,000, whichever is less. Now when you take that money out you see your account value drop by that much. Now, when you make those loan repayments they either come out of your paycheck automatically or you send in a check. The catch is, since you borrowed that money to use for whatever, it's basically income in the IRS's eyes so you have to pay it back with after tax money, probably 25% or so... If you looked at your paystub while doing this, you'd see you had a 401K contribution that was pre-tax and your loan payment comes out after tax. Now after you pay that money back, it goes back and buys whatever investments you have chosen and when you withdraw it in retirement you have to pay income taxes on it again. Yes it sucks and most people don't know but it's true, thats why they make it hard for you b/c it sounds a lot sweeter of a deal than it actually is. When you borrow that money you pay it back with after tax money and then pay income tax on it again when its withdrawn in retirement and you're typically buying back investments at a higher price raising your cost basis and lowering your overall earnings... That's why the 401 K loan isn't a good idea. The money you borrowed you lost probably 25% of it to the IRS in taxes and whatever else you have for state and local taxes as well as raised your cost basis on your investments. That money you paid back on the loan will get taxed again as well when you withdraw it in retirement so I don't think you fared as well as you think you did if you really sit down and crunch your numbers... If you have any questions let me know.

[annabella1]

I have "crunched the numbers" and what I pay in taxes makes no difference on the profit I made on the 401k. If I hadn't borrowed the money from myself I would have lost 6%, and I would have borrowed the money from someone else to get the car (probably would have had to pay a lot more than 6% interest) and I would be paying it with "aftertax" money just the same. So I would have lost at least another 10 to 15%. The fact that my son paid me back including the interest and I put that in an IRA also increases my profit. Comparing monies paid in taxes to monies made in profit is like comparing apples to oranges in my opinion. Also the money borrowed is not considered "income" only money divested is considered "income".
Speaking of taxes I didn't adjust anything in my taxes this year and had exactly $27 dollars coming back from the Feds and $25 going out to the State. I plan it that way so that they are not using my money for free all year and I wont have a huge amount to pay in April. When I retire and use the money from my 401k I know I will be in a much lower tax bracket and yes the taxes will be paid again then, but I will have a larger amount in my 401k because I didn't loose 6%. Basically what I am saying is that you don't make money on investments that loose money. I would rather invest in myself.

[ryanmercer]

I have "crunched the numbers" and what I pay in taxes makes no difference on the profit I made on the 401k. If I hadn't borrowed the money from myself I would have lost 6%, and I would have borrowed the money from someone else to get the car (probably would have had to pay a lot more than 6% interest) and I would be paying it with "aftertax" money just the same. So I would have lost at least another 10 to 15%. The fact that my son paid me back including the interest and I put that in an IRA also increases my profit. Comparing monies paid in taxes to monies made in profit is like comparing apples to oranges in my opinion. Also the money borrowed is not considered "income" only money divested is considered "income".
Speaking of taxes I didn't adjust anything in my taxes this year and had exactly $27 dollars coming back from the Feds and $25 going out to the State. I plan it that way so that they are not using my money for free all year and I wont have a huge amount to pay in April. When I retire and use the money from my 401k I know I will be in a much lower tax bracket and yes the taxes will be paid again then, but I will have a larger amount in my 401k because I didn't loose 6%. Basically what I am saying is that you don't make money on investments that loose money. I would rather invest in myself.


You still lost money... perhaps not yet, but in the end you will have lost.

[I_AM_LEGEND]

you borrowed the money you otherwise would have lost 6 percent on... *You said you do this so you don't have to borrow from other people... * Ok so you take your own $100 on a loan, everyone else leaves there's and it drops to $94. I imagine you're in the 25% tax bracket so you're 401K loan payments get taxed first before they go into the 401K, so at a 25% federal income tax rate you pay about $135 in order for $101.25 (130x0.75=101.25) to go back into your 401K. The other people in your 401K plan that didn't do anything lost 6 percent over this time period. Some of your money lost 6% as well and the money you borrowed, you lost about 25% of that in taxes when you pay it back since it's repaid with "after tax" money. *Along with that, you're probably buying shares back at a higher price than you initially bought them for raising your cost basis. Even if you take the 6% loss in your 401K and used a credit card and paid say 10% interest, that's only a combined 16% you're losing in either your 401K and interest to credit cards.... Now you're losing 6% of what you left in the 401K and paying 25% in taxes (interest to the govt.) on what was tax-deffered money only to have to pay income tax on that same "paid back loan" money once you withdraw it in retirement. *Hate to break it to you but you did lose money on the whole thing, ask anybody that works with 401Ks or a financial advisor and they'll tell you the same.

http://retireplan.about.com/od/401kstrategies/a/401k_loan.htm

check the bullets at the bottom.

Those people that did lose money 6% are probably just buying more shares of their investments at a lower price as well which will give them more shares to sell and dividends to collect in the future, as long as you're still in the accumulation phase saving for retirement you should keep buying shares even if the markets are down, think of it as those mutual funds being on sale..

There's a lot more to it related to raising your cost basis, lost earning/dividends, tax issues and other areas that are to be considered more than just how the 401K account did and the interest of a 401k loan vs a bank loan or credit card interest.

http://www.soho.org/Finance_Articles/401k_Loans.htm

Here's a really good fictional case study that talks about buying a car and considering a 401k loan, pretty much everything that I've been trying to portray to you. I don't think repaying yourself while having to pay after-tax money into your 401K at your income tax bracket is a valid alternative to a normal loan that will allow your 401K to grow either by cash value or number of shares and build your credit score.

[annabella1]

Your last example actually proves my point. The example assumes that the profits on your 401K will be more than what you would have in interest. In this case there were no profits on the 401K there was a 6% loss. If you do the columns as is suggested, and there continues to be a loss, I would have a great deal more at retirement by borrowing than letting it remain in the 401K even with paying the 20% tax bracket that I am in. I am not suggesting that this will always work, but in this instance I have more money now in my 401K than I would have if I had not borrowed from myself.