Edit: Misinterpreted what a 401(k) is. I thought it was a tax-free savings account that you can borrow against, rather than a form of pension plan. The UK does have something somewhat similar: a personal pension scheme. The rest of this comment is wrong, but I'll leave it here for giggles.
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They don't really always exist. As far as I'm aware there isn't really the British equivalent of a 401k, for example. Brits have ISAs but they're just tax free savings accounts with an interest rate generally well below inflation. Cash ISAs also come with the restriction that you can only deposit a very low amount into them per year -- this year it's £5,760. You also can't re-deposit withdrawn money without that further deposit subtracting from your annual deposit limit.
The trouble with putting large amounts of money in a savings account is that it generally comes with interest rates that (even before tax) are less than inflation. Savings accounts are great for socking away money to cover temporary shortfalls in income, but not much else.
That is one thing I don't understand, is the advice to not borrow against your 401k. Lets say you have a 3-year auto loan, that is 7% interest. If you convert that to a 401k loan at 4%, that is a savings right there.
Oh, but that money you borrowed isn't getting any investment returns in our 401k (I hear people say). But it is -- it is getting a 4% return (what you are paying back in interest). And considering that a well balanced fund is going to have some amount in a lower fixed-interest investment, that isn't much of a problem (just rebalance the fund when you take your loan out, then rebalance again as it gets paid off).
The ONLY downside I see, is that you have to pay it back all at once if you lose your job, or face a 10% penalty (plus tax) on the loan balance.
The money that you take out of the 401k is no longer protected against creditors. (Someone borrowing from a 401k seems more likely than the average 401k holder to be at risk for bankruptcy.)
Some plans do not permit net-new contributions while a loan is outstanding. Even when plans permit it, the fact that you're borrowing on Thursday might not have you in a situation to make payroll deductions on that Friday. (This is situational, of course. If you're in dire straits overall, you might still not be making contributions.)
I'd consider borrowing from a 401k to buy a house, or to pay off credit card debts that were 15% or worse and that's it, full stop. Refinancing 7% debt at 4% seems not worth it, especially if you're taking money out of equities to do it.
Ah, I see -- it is a problem borrowing from 401k if you pay it back out of your existing contributions. Makes sense -- I've just never thought of it that way. To me, it only makes sense if you are substituting it for a regular loan, and not touching the contributions overall. In other words, if you are in a good financial situation to take out a regular loan, then a 401k loan could make sense also.
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They don't really always exist. As far as I'm aware there isn't really the British equivalent of a 401k, for example. Brits have ISAs but they're just tax free savings accounts with an interest rate generally well below inflation. Cash ISAs also come with the restriction that you can only deposit a very low amount into them per year -- this year it's £5,760. You also can't re-deposit withdrawn money without that further deposit subtracting from your annual deposit limit.
The trouble with putting large amounts of money in a savings account is that it generally comes with interest rates that (even before tax) are less than inflation. Savings accounts are great for socking away money to cover temporary shortfalls in income, but not much else.