401k loans


Big Eyed Bug
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A buddy of mine was asking me about using a 401k loan to buy some real stuff (metals, land or whatever) and asked me to poke holes in the idea. I'm much more comfortable with the general concepts of Austrian economics than I am with the nitty gritty workings of financial instruments. I'm really not good at that stuff at all. So I ask the great minds of PMBug.com for their wisdom.

He explained it as you take the loaned funds out of your 401k and then have to pay it back at base rate + 1%. At the end of the day you are just paying yourself the interest, basically putting more money back into the 401k than you took out. I assume the banksters who run 401ks are okay with this since it puts more cash back into their system.

It makes sense if you think the market is going down since you can take the loan, buy stuff that will have a better return than the market, and sell some of it to pay back the 401k. So, take some out to buy a stack, market goes down, metal goes up, and you pay back to your own 401k AND you have a stack. Even if you need to sell part of the stack you still end up ahead if dollar prices move in the right directions.

It sounded like the risks are that if you are terminated then you have to pay back the loan very quickly and if not get hit with fees and taxes for taking an early distribution from the 401k. Also, if prices move the wrong way you miss out in digifiat growth within the 401k, but you still have the stack (especially if you can pay the loan back with fiatincome instead of selling the stack).

So is there any reason to not take a 401k loan from yourself and buy a stack?
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Workers will be limited in tapping their 401(k) retirement plans for loans under legislation two senators introduced today that’s designed to counter the erosion of retirement assets.

“Because of the difficult economic times, more and more Americans are treating their retirement accounts as rainy day funds,” Senator Herb Kohl, a Wisconsin Democrat, said in a statement today. “A 401(k) savings account should not be used as a piggy bank.”

Kohl, 76, who’s chairman of the Senate Special Committee on Aging, introduced the “SEAL 401(k) Savings Act” with Senator Mike Enzi, 67, a Wyoming Republican. The bill would reduce the number of loans workers may take from a 401(k) and give participants more time to repay after losing a job. It will allow savers to contribute to their plan after taking a hardship withdrawal and ban debit cards linked to the accounts, according to the legislation.
“The big risk with loans is that participants leave their job,” said Alison Borland, head of retirement strategy for Aon Hewitt. Most 401(k) plans require employees to repay loans in full when leaving a job, usually within 60 days, said Borland, who’s based in Nashville, Tennessee. Almost 70 percent default, Borland said, so the unpaid funds get counted as taxable income and may add to the burden of a jobless worker.

Depending on the rules of an employer’s 401(k) plan, workers generally may borrow from their retirement account for any reason and pay the loan back with interest. About 89 percent of participants were in plans offering loans in 2009, according to the Washington-based Employee Benefit Research Institute, which has a database of 21 million 401(k) savers.

Workers generally may borrow as much as 50 percent of their vested account balance up to a maximum of $50,000, according to the Internal Revenue Service. The loan must be repaid within five years, unless the money was used to buy a primary home.

Employees can repay the loan through payroll deductions and can continue to make contributions to their retirement accounts, Borland said. More than 80 percent of those with a loan do continue to save, she said.

“For these workers who take a loan, repay it and continue to save, they haven’t done significant damage to their retirement prospects,” Borland said. “They are at significant risk if they change jobs or lose their job.”

More: http://www.bloomberg.com/news/2011-...-savers-using-401-k-s-as-rainy-day-funds.html
Market of Precious metals are a bit volatile at the moment. Although the returns from them would leave some marginal profit for you but only if you can wait for a while before you sell your stuff off. In the meantime, termination can cause serious troubles but if you can continue with your job, then it won't sound unwise to make some investments in metals.
Seems like the biggest issue in all of this is the job stability. I'd have to feel pretty confident in my place at work.

By the way I think it is unfortunate that the privileged Senators don't like people using their money the way they see fit. I mean, perhaps they would help us spend it better if we just gave it all to them instead. Fucking. Assholes.
My buddy was talking of a pretty sizeable stack relative to the 401k, but reading the article Bug posted I had the idea of doing smaller loans. Maybe take out enough to buy a few onzas del oro fino when prices take a dip and pay it back in a few months or something (or less even). That way you could BTFD without busting the monthly expenses and then pay it back with cheaper money in a relatively short term timeframe (for loans anyways) so that job loss risk is lessened. Hmmm....
Besides getting a large company match, I do not understand why people would use a 401k? Covered under the same U.S. tax laws, you can get a self directed IRA that allows you to invest directly into PMs.

I did the 401k loan thing... for medical issues. Then, decided to leave that job and cashed out the 401k. Well, well... that loan is treated as a disbursement, which raises your income for the year, which wreaks hell on your taxes. Plus, you pay all of the distribution penalties on the money.

At my new place of work --- they contribute whether I contribute or not. So, I don't.

But I let them :)

I do make a bi-weekly PM purchase, though in lieu of paying into the big brother 401k.

I've learned my lesson.

My employer matches 100% of what I put in, up to 6% of my income. I can't pass on the free money, quite honestly. The situation though is that I cannot get a loan like you are discussing. Only in dire need would I be able to access it. Since I am a very regular and healthy person, knock on wood, I don't expect any health crisis happening soon.
I guess that it goes company by company regarding the rules for which you can take a loan on the 401k. At my previous company I was able to take a loan for any reason, but a disbursement could only be taken for a few reasons which I think are regulated by the feds.

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