Taking out a 401k loan

[huey1124]

i have a question about taking out a 401k loan. let's say you have $10000 in balance, and you want to take out a loan for $4000. i understand that the repayment for $4000 loan is deducted from your paycheck AFTER tax, plus around 7% interest. and in the event you lose your job or get fired, unless the outstanding balance can be paid back within few weeks, the said amount is deducted from the 401k balance and treated as an early withdrawl (taxed AND penalized).

so my question is, is the new balance of your 401k $6000 after you take out the loan (since you borrowed $4000), or is the balance still $10000 but you're repaying against a virtual loan? i guess the difference would be, in a recovering economy like this, a person won't be able to buy as many shares of mutual funds now that the price per share has risen, affecting the total of retirement fund. also, if the person is maxing out his/her 401k now, can he/she continue to max out by contributing the same amount per paycheck in addition to the repayment? (although repayment is AFTER tax and the $12500 limit set by Bush administration refers to BEFORE tax contribution)

if someone can answer these, i would appreciate it! thanks in advance.

 

[conjur]

Virutal loan? You mean the money you receive from the loan is virtual money? You can't just gain $4000 in your 401(k) if you take $4000 out as a loan.

 

[RossMAN]

I don't think all 401k's are the same but here's how mine works:

We're assuming that you are 100% vested (which usually takes 1 to 7 years of service with your company), if you're a n00b you prob are not 100% vested.

I can only borrow up to 50% of my vested balance, so if my balance were $10,000 I could only borrow $5,000

So using my 401k's guidelines you would be eligible for a loan since $4,000 is less than 50% of your $10,000 vested balance.

If you were to lose your job, quit or get fired your balance would be $10,000 - $4,000 current loan balance = net balance of around $6,000

 

[huey1124]

Originally posted by: conjur
Virutal loan? You mean the money you receive from the loan is virtual money? You can't just gain $4000 in your 401(k) if you take $4000 out as a loan.

i know i didn't word it correctly. virtual, what i was trying to say was that the loan is separate from the 401k balance, meaning the loan was not deducted from the 401k balance right away.

 

[huey1124]

Originally posted by: RossMAN
I don't think all 401k's are the same but here's how mine works:

We're assuming that you are 100% vested (which usually takes 1 to 7 years of service with your company), if you're a n00b you prob are not 100% vested.

I can only borrow up to 50% of my vested balance, so if my balance were $10,000 I could only borrow $5,000

So using my 401k's guidelines you would be eligible for a loan since $4,000 is less than 50% of your $10,000 vested balance.

If you were to lose your job, quit or get fired your balance would be $10,000 - $4,000 current loan balance = net balance of around $6,000

yeah, i am 100% vested, and i knew about being able to borrow up to 50% of vested balance (and with up to 2 outstanding loans at any time).

can anyone answer my questions? thanks.

 

[ahartman]

Originally posted by: huey1124
i have a question about taking out a 401k loan. let's say you have $10000 in balance, and you want to take out a loan for $4000. i understand that the repayment for $4000 loan is deducted from your paycheck AFTER tax, plus around 7% interest. and in the event you lose your job or get fired, unless the outstanding balance can be paid back within few weeks, the said amount is deducted from the 401k balance and treated as an early withdrawl (taxed AND penalized).

so my question is, is the new balance of your 401k $6000 after you take out the loan (since you borrowed $4000), or is the balance still $10000 but you're repaying against a virtual loan? i guess the difference would be, in a recovering economy like this, a person won't be able to buy as many shares of mutual funds now that the price per share has risen, affecting the total of retirement fund. also, if the person is maxing out his/her 401k now, can he/she continue to max out by contributing the same amount per paycheck in addition to the repayment? (although repayment is AFTER tax and the $12500 limit set by Bush administration refers to BEFORE tax contribution)

if someone can answer these, i would appreciate it! thanks in advance.

After your loan, your 401(k) balance is $6000. There is no such thing as a 'virtual loan'. It's cash you're removing from your retirement account.

Whether you can continue to contribute to your 401(k) during loan repayment or not depends on your plan rules. If your plan allows it, and your paycheck is large enough, I would imagine you could max your contributions as well as have the repayment deductions taken.

If you absolutely need they money, this is a good source, but the biggest problem is that your entire balance is no longer working for your retirement.

Call your benefits department rather than ask here - they'll know the specifics of your plan.

 

[huey1124]

thanks for the reply.

i don't need the money, but i was thinking about it as an option. i already made some very large purchases this year so far (bought an SUV, bought 5 computers, vacation, etc.. all paid by cash) and my savings account is smaller as a result. at some point i need to propose to my gf, and my eyes are set on a ring that will cost around $15k-18k. i'm not sure if i should use the money from my savings, or maybe borrow money from my 401k to pay for the ring. my paycheck is large enough, that i can continue to max out my 401k and make repayment at same time. any suggestions?

 

[schdaddy]

Originally posted by: huey1124
thanks for the reply.

i don't need the money, but i was thinking about it as an option. i already made some very large purchases this year so far (bought an SUV, bought 5 computers, vacation, etc.. all paid by cash) and my savings account is smaller as a result. at some point i need to propose to my gf, and my eyes are set on a ring that will cost around $15k-18k. i'm not sure if i should use the money from my savings, or maybe borrow money from my 401k to pay for the ring. my paycheck is large enough, that i can continue to max out my 401k and make repayment at same time. any suggestions?

HOLY SH!T:Q

 

[Jzero]

Originally posted by: schdaddy

Originally posted by: huey1124
thanks for the reply.

i don't need the money, but i was thinking about it as an option. i already made some very large purchases this year so far (bought an SUV, bought 5 computers, vacation, etc.. all paid by cash) and my savings account is smaller as a result. at some point i need to propose to my gf, and my eyes are set on a ring that will cost around $15k-18k. i'm not sure if i should use the money from my savings, or maybe borrow money from my 401k to pay for the ring. my paycheck is large enough, that i can continue to max out my 401k and make repayment at same time. any suggestions?

HOLY SH!T:Q

^2

You should read the "Don't buy a diamond" thread.

 

[huey1124]

Originally posted by: schdaddy

Originally posted by: huey1124
thanks for the reply.

i don't need the money, but i was thinking about it as an option. i already made some very large purchases this year so far (bought an SUV, bought 5 computers, vacation, etc.. all paid by cash) and my savings account is smaller as a result. at some point i need to propose to my gf, and my eyes are set on a ring that will cost around $15k-18k. i'm not sure if i should use the money from my savings, or maybe borrow money from my 401k to pay for the ring. my paycheck is large enough, that i can continue to max out my 401k and make repayment at same time. any suggestions?

HOLY SH!T:Q

seriously though, if you ask any single girl, they all say the diamond should be no smaller than 1 ct., at minimum. i was looking at a 1.5ct with 2 side stones, for a total of 2 cts. even 1.5ct doesn't look all that big.

 

[kranky]

Personally I think it would be a bad move to borrow from a 401k unless absolutely necessary. Do you know if you will be able to continue contributing, as ahartman asked? Will they make you sit out for a while?

How long would it take you to pay it back? Will you be borrowing the entire $15-18K from your 401k?

Have you taken into account what the insurance will be on a ring like that?

 

[StageLeft]

and my eyes are set on a ring that will cost around $15k-18k.

I don't know how well to do you are but I can't advise strongly enough against an exhorbitant ring expense. If she's the girl for you she will not care. All it will be doing is nothing other than throwing away money. It's your money, but I'm sure a married couple could make good use of $15k if you spend only a few on the ring.

 

[Jzero]

Have you taken into account what the insurance will be on a ring like that?

And are you getting a prenuptial agreement?!

 

[RossMAN]

Originally posted by: schdaddy

Originally posted by: huey1124
thanks for the reply.

i don't need the money, but i was thinking about it as an option. i already made some very large purchases this year so far (bought an SUV, bought 5 computers, vacation, etc.. all paid by cash) and my savings account is smaller as a result. at some point i need to propose to my gf, and my eyes are set on a ring that will cost around $15k-18k. i'm not sure if i should use the money from my savings, or maybe borrow money from my 401k to pay for the ring. my paycheck is large enough, that i can continue to max out my 401k and make repayment at same time. any suggestions?

HOLY SH!T:Q

Holy sh!t is right.

That's the cost of an ENTIRE WEDDING!!!

I would seriously re-consider.

Dayum!

 

[huey1124]

Originally posted by: kranky
Personally I think it would be a bad move to borrow from a 401k unless absolutely necessary. Do you know if you will be able to continue contributing, as ahartman asked? Will they make you sit out for a while?

How long would it take you to pay it back? Will you be borrowing the entire $15-18K from your 401k?

Have you taken into account what the insurance will be on a ring like that?

right, i need to find out if i can continue to contribute. as i'm still young, i figured it wouldn't set me back that much if the entire 401k balance was not able to work for me (but maybe i'm wrong, that's why i'm posting here).

i think a typical 401k loan requires 5 years to pay back? i figured even if i took out a bank loan, or put it on credit, it would still cost me same repayment and time to pay for the ring. i probably will only borrow around 10k from my 401k or so, and subsidize the rest from my savings. i really hate buying anything with a loan, as i'm paying higher with the interest.

how much is insurance for a ring anyways? do i even need one??

 

[huey1124]

Originally posted by: Skoorb

and my eyes are set on a ring that will cost around $15k-18k.

I don't know how well to do you are but I can't advise strongly enough against an exhorbitant ring expense. If she's the girl for you she will not care. All it will be doing is nothing other than throwing away money. It's your money, but I'm sure a married couple could make good use of $15k if you spend only a few on the ring.

well, i'm far from rich by any means, but my job pays enough for me to pay bills and put some money away each month. she did say she doesn't care about the size of the ring, but i know that's not how the girls REALLY feel. i have a lot of female friends as well, and i've learned a lot about how girls think over the years. to make matters worse, my sister was married about 3 years ago, and her husband proposed with a $75,000 ring. no joke, well that's how much they insured it for anyways. so i have this pride thing as well, especially since my gf knows how nice of a ring my sister got. her husband is much better off than i am, and he made millions from the stock boom, but still i can't give my gf something that is so much smaller. oh well.....

 

[huey1124]

Originally posted by: Jzero

Have you taken into account what the insurance will be on a ring like that?

And are you getting a prenuptial agreement?!

no, i don't want to

 

[RossMAN]

huey1124 - I would budget $1,500 - $2,500 for the ring.

Repayment terms are usually set by the borrower (YOU). My 401k program let's me specify the number of years and months anywhere from 1 month to 10 years.

 

[kranky]

Do you even need a ring? I don't think so, and neither did my wife. Do you need insurance for a ring like that? You sure do.

Borrowing that kind of money for a ring doesn't make a lot of financial sense regardless of whether it's a 401k loan or a bank loan, especially if you are going to need five years to pay it back.

 

[Eli]

Originally posted by: huey1124

Originally posted by: Skoorb

and my eyes are set on a ring that will cost around $15k-18k.

I don't know how well to do you are but I can't advise strongly enough against an exhorbitant ring expense. If she's the girl for you she will not care. All it will be doing is nothing other than throwing away money. It's your money, but I'm sure a married couple could make good use of $15k if you spend only a few on the ring.

well, i'm far from rich by any means, but my job pays enough for me to pay bills and put some money away each month. she did say she doesn't care about the size of the ring, but i know that's not how the girls REALLY feel. i have a lot of female friends as well, and i've learned a lot about how girls think over the years. to make matters worse, my sister was married about 3 years ago, and her husband proposed with a $75,000 ring. no joke, well that's how much they insured it for anyways. so i have this pride thing as well, especially since my gf knows how nice of a ring my sister got. her husband is much better off than i am, and he made millions from the stock boom, but still i can't give my gf something that is so much smaller. oh well.....

Money doesen't buy love, dude.

If it's for real, she will be just as happy with a 5k ring as she will a 15k ring. Investing the saved 10k would be a much wiser choice - afterall, she may leave.. but your investment won't.

 

[kranky]

Originally posted by: huey1124
well, i'm far from rich by any means, but my job pays enough for me to pay bills and put some money away each month. she did say she doesn't care about the size of the ring, but i know that's not how the girls REALLY feel. i have a lot of female friends as well, and i've learned a lot about how girls think over the years. to make matters worse, my sister was married about 3 years ago, and her husband proposed with a $75,000 ring. no joke, well that's how much they insured it for anyways. so i have this pride thing as well, especially since my gf knows how nice of a ring my sister got. her husband is much better off than i am, and he made millions from the stock boom, but still i can't give my gf something that is so much smaller. oh well.....

I'd look at it this way. You can't compete with a $75,000 ring. Do you really think $75,000 vs. $15,000 is going to be a heck of a lot different compared to $75,000 vs. $5,000?

And your gf said she didn't care, but you are going to believe what other female friends say instead?

 

[StageLeft]

well, i'm far from rich by any means, but my job pays enough for me to pay bills and put some money away each month. she did say she doesn't care about the size of the ring, but i know that's not how the girls REALLY feel. i have a lot of female friends as well, and i've learned a lot about how girls think over the years. to make matters worse, my sister was married about 3 years ago, and her husband proposed with a $75,000 ring. no joke, well that's how much they insured it for anyways. so i have this pride thing as well, especially since my gf knows how nice of a ring my sister got. her husband is much better off than i am, and he made millions from the stock boom, but still i can't give my gf something that is so much smaller. oh well.....

Cost of ring has no correlation to the success of the marriage of love of the couple. Some women (frankly the insecure ones) think that a guy has to spend a lot of money on a ring. I bought Mrsskoorb's one with cash (about 10% the amount you want to spend). I can think of fewer bad financial moves than taking out a loan (401k or other) for an engagement ring.

That money can be much better used. We've got some friends with rings bigger than mrsskoorb's but I know they are worse off money wise, so instead of a beacon of their wealth it serves as a beacon of their financial weakness and nothing more. I know for a fact that she likes the rings she has and would never have wanted me spending more. You cannot compete with your sister's hubby because you do not have $75k to spend, so don't even bother. It's a fight you cannot win, and a fight not worth winning even if you could.

 

[huey1124]

thanks for the replies, i really appreciate your feedbacks.

to answer one of the questions, yes i believe i need a ring to propose. of course she's not going to say no if i don't have one, but i think it's one of those unwritten rules about engagement and courtship. that's my personal belief.

as for the budget for the ring, you see me and my gf are both koreans. it's almost part of my culture, that a guy needs to spend significant amount of money on an engagement ring. i know some people would jump on me for say that, but it's true. i know she loves me no matter what, but i also know that she wants a ring that she can show to her family and friends with pride. am i being too stupid for thinking like that?

 

[StageLeft]

as for the budget for the ring, you see me and my gf are both koreans. it's almost part of my culture, that a guy needs to spend significant amount of money on an engagement ring. i know some people would jump on me for say that, but it's true. i know she loves me no matter what, but i also know that she wants a ring that she can show to her family and friends with pride. am i being too stupid for thinking like that?

Well you're not but I'd call the culture stupid if it really pushes that belief.

I'll also say visually to the average joe who knows nothing about jewellry there is not a big difference between a $5k and a $15k ring.

 

[Eli]

Originally posted by: huey1124
thanks for the replies, i really appreciate your feedbacks.

to answer one of the questions, yes i believe i need a ring to propose. of course she's not going to say no if i don't have one, but i think it's one of those unwritten rules about engagement and courtship. that's my personal belief.

as for the budget for the ring, you see me and my gf are both koreans. it's almost part of my culture, that a guy needs to spend significant amount of money on an engagement ring. i know some people would jump on me for say that, but it's true. i know she loves me no matter what, but i also know that she wants a ring that she can show to her family and friends with pride. am i being too stupid for thinking like that?

No, not at all.. Although it does seem kind of shallow. None of that garbage really matters as far as your relationship goes.

If it's a cultural thing, that's fine.. But damn, that's a huge chunk of change.. especially if you can't really afford it. If it would hurt you financially, I bet she wouldn't want you to do it.

I'm only going to spend a few K on a ring when the time comes.. Its the thought that counts, and nobody is going to say "man, what a cheap piece of garbage"..