Currently employed and considering borrowing my 401k, as I understand that if I'm terminated or resign, I only have 30 days from my termination date to pay back these funds. I've spoken to my custodian of the 401k funds and apparently it's pretty simple provided you are still an employee at your current firm, you fill out a form, no questions are asked by anyone on why you need the funds, it's just up to you to return the funds plus interest to your plan within a specified amount of time (I believe 90 days? Help here please), OR you pay a penalty and the "loan" is treated as a regular distribution, and taxed accordingly. The question is, has anyone borrowed from their 401k and traded with the money in order to seek a higher rate of return, then returned the funds plus interest back to the plan? Is this allowed? Please don't respond with a Vanguard-type answer "This is a bad idea, trading is risky, you might lose your retirement savings, and that retirement plan is for long term investing only." Let's just assume that I'm virtually guaranteed of earning a higher rate of return on the funds that I borrow as compared to any interest I may pay before returning the funds to the plan. Has anyone done this, or considered it? It seems most of us probably have some untapped capital that we have access to, at least temporarily...
The thread above should read "Borrowing FROM my 401k", and from what I understand, you can borrow up to 50% of your balance.
When you used the phrase "virtually guaranteed" I immediately cringed. Don't raid your 401K! Work and save to build up some trading capital. Don't spend your future. Doing this is akin to refinancing with a sub-prime zero-down mortgage. It seems like a good idea on the surface but is potentially disastrous.
Thanks for the answer i wasn't looking for. Please, i'm not looking for advice on the wisdom of doing this, but the legality. Let's face it, your 401k is severely limited in what you can invest in, in my circumstances its terrible mutual funds only. Put some of these funds in a regular brokerage account and we're talking much more flexibility. I know, I know, I may lose it all, trading is risky, etc, etc, build up your wealth, John Bogle, long term, investing,..... That's not what I'm asking. Has anyone done it, and can you do it? Thanks
It can be done, my mentor did it. Not all companies will let you do it however. It's a great idea, especially since you're paying interest to yourself.
Depending upon the circumstances, it is actually preferable to draw from your 401k. I wouldn't necessarily do it for trading, but suppose you need a loan to pay off high interest debt. You take out a 401k loan, pay off the debt, and the interest you pay on the 401k loan is applied back to your 401k balance. At least this is the way it works at my employer. Your 401k balance grows by the amount of interest that you pay. I do agree with Steve in that if you have a "bullet-proof" strategy, there will be no rush to get in. Cut back your expenses, save, and then get started. Delaying your newfound wealth for a few months will not kill you. If it does not work out, not only will you be out your 401k, but you will have to pay the 10% penalty. No bankruptcy laws to protect you there. Uncle Sam will wipe his ass with any excuses.
Thanks for the solid advice guys, I appreciate the time and you brought up some things I hadn't considered.
I have borrowed from my 401(k) before -- took it out as a loan and it was paid back thru payroll deductions. For me, it was a great move as it really helped lighten the load of some debt I had at the time. As far as trading with it goes, maybe have some type of drawdown limit (say 25%). If you go below that, you have to stop trading and pay back the money. Also, if you make more than a certain % over your principal, then you use that money to pay back the loan. The most important thing is to have some type of discipline regarding your trading and payback.
When you post a question in a public forum you open yourself up to criticism. You answered your own question when you said no questions are asked as to what the loan will be used for. What you are getting is real advice from people that apparently know the risks much more than you do. If you don't like the responses, grow a pair and be more direct with your custodian or take some of that guaranteed profit and pay an attorney.
Options Poet, what in the world are you talking about? I just thanked you for your advice, sincerely. I guess since this is a forum, it has to be like every other forum out there in cyberspace where there has to be the tough guy who puts the smackdown on me and throws out the staple "this is a public forum what do you expect" rhetoric. Thanks again. Can we end this?