401k loan for vehicle purchase?

[NoMoreCards]

I live in Michigan and paid 1300 last year to plow the snow from my driveway. So this year, I would like a truck and not throw away that money, while being able to plow it myself. Also, money can be made by plowing snow for others.

That being said, I have 2 options to buy a truck I have found from a private party. 2004 F250, 40K miles on it. Blue book is 28K, sale price is 19K.

1.) attempt to get a loan (not easy for a private party loan) and pay a high interest rate, IF approved.

2.) do a 401k loan, and paying the interest back into my own account. The good part is if I lost my job, I would not have a truck payment and could just pay the taxes and penalities for early withdrawal. However, there is no approval process, and the payment out of my check would be much lower than through another source.

I am thinking that although it normally isn't a good idea to take loans on a 401k, that in this case it might be the wise decision. I wanted to get some opinions on this. Any money made from plowing snow, could be paid right back into the 401k. But the security of no truck payment if a job loss happens, is a beautiful thing.

Opinions?

[jribe]

that would be perfectly fine- i assume you're discharged?

If not- wait until that happens to purchase the truck out right- just in case!

It's not a bad idea to do a 401k loan- it's a bad idea to do a withdrawl. The loans are usually really good interest rates (i know ours right now is at 5%), and you usually wouldn't get that rate in the finacial sector. The payments are low and then you don't have to worry about a payment on the truck.

Sounds like a good plan to me.. good luck!

I live in Michigan and paid 1300 last year to plow the snow from my driveway. So this year, I would like a truck and not throw away that money, while being able to plow it myself. Also, money can be made by plowing snow for others.

That being said, I have 2 options to buy a truck I have found from a private party. 2004 F250, 40K miles on it. Blue book is 28K, sale price is 19K.

1.) attempt to get a loan (not easy for a private party loan) and pay a high interest rate, IF approved.

2.) do a 401k loan, and paying the interest back into my own account. The good part is if I lost my job, I would not have a truck payment and could just pay the taxes and penalities for early withdrawal. However, there is no approval process, and the payment out of my check would be much lower than through another source.

I am thinking that although it normally isn't a good idea to take loans on a 401k, that in this case it might be the wise decision. I wanted to get some opinions on this. Any money made from plowing snow, could be paid right back into the 401k. But the security of no truck payment if a job loss happens, is a beautiful thing.

Opinions?

[AngelinaCatHub]

that would be perfectly fine- i assume you're discharged?

If not- wait until that happens to purchase the truck out right- just in case!

It's not a bad idea to do a 401k loan- it's a bad idea to do a withdrawl. The loans are usually really good interest rates (i know ours right now is at 5%), and you usually wouldn't get that rate in the finacial sector. The payments are low and then you don't have to worry about a payment on the truck.

Sounds like a good plan to me.. good luck!

I agree with 'jribe', with a caveat. It is too hard to pay that loan back and many people do not. (including myself). If you are intent to pay this back and also not reduce your contribution, I see no reason not to. In your state, better to be safe than sorry. You may be using that truck to move South. Also I agree, wait till your discharge. 'Hub

[NoMoreCards]

Thank you both. I feel better about it having someone else's thoughts on this. I am not discharged yet, but will be in 2 weeks time, so I will wait until it is official.

I have no choice paying the 401k payments, as it comes right out of the check before I get it. There is no way to NOT make the payments, if I continue working here.

Thanks for your time.

[Amy26]

I also agree that taking a 401k loan is actually the smartest way to borrow money. You're paying interest to yourself...

I have taken a few in my days and just wanted to add one thing... generally, if you lose your job through being laid off, you can still make payments on the loans. The 401k holding company will make arrangements with you to keep making payments through bank draft or something. I had to go through this myself when I got laid off from my job. They may reamoritize the loan a bit if it takes a little while for you to get everything worked out, but my payments basically stayed the same.

The only time they will not let you continue to make payments is if you quit of your own accord.

[NoMoreCards]

My dad had a 401K loan when he lost his job (due to a medical disability). They tried to set up payments for my dad to continue paying his loan, but he had no income at the time. (waiting for disability). In any case, he ended up getting a 1099-??? that showed the amount owed as a early withdrawal and he ended up paying taxes on the amount, and a 10% penalty.

In the end, this worked out well for him, because he could not make the payments.

[Logan]

I read your post last night and was thinking about your situation during a run today. I decided to post a few things to consider.

-I'm not sure of your age but planning a loan from your 401K with the intent of taking a withdrawal if you lose your job may not be a great idea. You are going to retire someday and you're better off figuring a way to live without using your retirement even during job loss.

-As far as the decision between borrowing from the 401K versus getting a high interest loan here are a couple of things I would consider.

-Loan from 401K:
Low interest and you pay yourself. Remember that the interest will be taxed when you start withdrawing but even though it's taxed it has been put into your 401K where it will grow tax free.

-Loan from lender
While it is a high interest loan you will be able to write off the interest against your taxes since you'll be using it for your business. Also, it will be on your credit report so your credit rating will rebound quicker so you can get better terms in the future. Also, since you didn't touch your 401K it will continue to grow at say 6-8% (hopefully). I'm up 28% this year and was flat last year since I had moved my money into cash and took a loan while the market was tanking. There's no reason for anyone else not to have similar gains.

-Any money made from plowing snow can go into paying down your loan quicker!!! Not just the 401K loan

-Now if you take a loan from a lender you can always take a loan from your 401K later and you will always be able to withdraw from your 401K if you lose your job.

-That's some ideas I had for you to consider---good luck!!!

PS--I'm 42 and retirement is not that far off so I consider an early withdrawal a desperate measure. Get an emergency fund going or if you did lose your job then take a loan from your 401K if you have to but try not to take an early withdrawal.

Logan

[nerves]

A couple more things to think about - when you take a loan from your 401k, you are actually paying double tax. The loan payments are after tax and then when you withdraw the funds at retirement - you are taxed again.

It is very rare that a plan will allow for payments after a benefit event (termination, retirement, disability, etc). You usually have 60 days from the benefit event to pay the loan in full to avoid the 1099. After 60 days, the remaining loan balance is considered taxable. If you take a distribution of your remaining acct balance before the 60 day grace period to pay the loan in full, your grace period ends (example would be if you requested a distribution 30 days after termination - you will not have an additional 30 days to pay the loan back).

If the market continues to recover as we have seen over the last 6-7 months, you will be missing out on a great opportunity to recover the losses you may have incurred over a year ago when the market tanked.

I work in the pension industry and deal with 401k loans on a regular basis.

[NoMoreCards]

Logan and Nerves, you both have given me food for thought. I have to believe my job is secure as anyone's can be in this economy. I have been here 11 years, and we don't usually get rid of people unless there is a good reason. But things do happen and I'd be a fool to think I was secure.

I do not intend to file business taxes on the plowing from the truck. As I have a full time job, so any plowing that I do happen to make money on will just be small potatoes. Getting into the business taxes and accounting is not what I am wanting to do. Not technically legal, but there are worse things than pocketing a neighbors 30.00 for plowing without filing taxes.
I am not looking for corporate accounts, as my availability is limited due to my real job. But I can plow for neighbors, family, (me) and the like.

The market growth has finally been nice the last 6-8 months as you stated Nerves. But I think I might be better off paying myself interest (at whatever rate), then paying a financing company 24%. I realize that I would be paying taxes on that money twice (payment is after tax monies, and withdrawal will be taxed at retirement) but it still seems better than giving away 24% to a corporation.

I have lots to consider now, and this is exactly why I posted this.
Thank you very much for your words of advice. I will carefully think of all things posted and points to consider. I appreciate the time you have all taken to help me make the best decision possible.

[Logan]

I would probably get the high interest loan from a bank and borrow from my 401K to make a one time large payment so I would have 6 months left to pay it down so that my credit rating would improve.

No right or wrong answer just personal preference.

Logan