Need financial advice 401k, IRA, home purchase)

[alkemyst]

Legit? Yes. Reasonable? Questionable. The interest is only 'somewhat similar' in a certain situations and 'nowhere near similar' in many others. The interest rate is usually Prime + 1 or 2. If he had done this last year that would have been ~3.5 to 4.5%. VTSMX returned 27.66% in the last year. If you think 4.5% is 'somewhat similar' to 27.66% then I have a bridge to sell you.

Not everyone can dictate where their 401K money goes, also VTSMX requires a $10,000 buy in. I put $10k in last year and did really well, but had I been in prior to 2009 that would have been a bad year.


For every VTSMX out there there are tons of funds doing worst than 4.5%

 

[alkemyst]

OP: You're a complete dumbass and you have no clue what you are doing.

Money comes out of your 401k for one reason and one reason only: Life or death. Getting a new home is not one of those. Regardless of it being a LOAN, if you have to take a LOAN in order to make a down payment for ANOTHER LOAN (Mortgage) - you're the reason housing bubbles exist. Go get half a brain in Finance before you ask such retarded questions.

edit: Ever wonder why pawn shops are big business? Hint: It's not because people return for their item....

The housing bubble was hardly a result of that example.

 

[Exterous]

Not everyone can dictate where their 401K money goes

Well - something like 95%+ of stock funds did better than 4.5% last year so its very highly likely he has access to something that returned well above what his interest rate would be on a 401k repayment loan.

also VTSMX requires a $10,000 buy in.

Uh...not according to Vanguard:

Minimum investment $3,000

https://personal.vanguard.com/us/FundsSnapshot?FundId=0085&FundIntExt=INT

The Admiral shares do but thats VTSAX

For every VTSMX out there there are tons of funds doing worst than 4.5%

Tons? If you look at Vanguards website there is 1 stock fund out of 43 that did worse than 5.85%. Out of ALL 340 Fidelity funds offered only 73 returned less than 4.5%. Out of 191 stock funds only 7 returned less than 4.5%. Hell - T. Rowe Price doesn't have a single stock fund that returned less than 9% last year.

Perhaps your definition of 'tons' differs than mine but I don't consider 3% of stock funds offering gains of less than 4.5% or having the majority of offered funds providing more than 4.5% gains to be 'tons of funds doing worse than 4.5%'

Thats even beside the point - my selection of VTSMX was just to show that there are many (the majority this year) of cases where a return of 4.5% is not going to be similar to gains in the market. I just picked something that largely mimicked the stock market. If I wanted to cherry pick I would have gone with FBIOX which returned 52%

 

[alkemyst]

That's last year bro, and the rub is you are holding your money while getting that return.

I swore I had VTSMX, maybe it was VTSAX.

Either way not every can afford to leave their money in the market until retirement.

That was my point.

 

[Exterous]

That's last year bro, and the rub is you are holding your money while getting that return.

Sure and if you go out 5 years Vanguard still has 85% of stock funds returning more than 4.5%. Go out 10 years and 100% of their stock funds return 5.97% or higher with most being in the 9% range.

The point isn't that you will gain more money by leaving it in the stock market just that expecting 'similar' returns by paying yourself the 401k interest rate is foolish

Either way not every can afford to leave their money in the market until retirement.

That was my point.

Sure, but he can - he just doesn't want to

 

[alkemyst]

Sure and if you go out 5 years Vanguard still has 85% of stock funds returning more than 4.5%. Go out 10 years and 100% of their stock funds return 5.97% or higher with most being in the 9% range.

The point isn't that you will gain more money by leaving it in the stock market just be aware that expecting 'similar' returns by paying yourself the 401k interest rate is foolish



Sure, but he can - he just doesn't want to

You are spouting off investment DOGMA.

Most can't do 10 years or even 5 years outside their investment portfolio.

I have not seen these funds ever in my job's offerings, I had to use my own money to buy in.

 

[postmortemIA]

Disappointing to see that many don't understand how 401k no tax loans work. Is it really a loan if you are making payment out of one of your accounts?

A smart person would maximize his 401k contribution instead putting dollars into .75% savings account.

 

[Exterous]

You are spouting off investment DOGMA.

Most can't do 10 years or even 5 years outside their investment portfolio.

I have not seen these funds ever in my job's offerings, I had to use my own money to buy in.

So do you have any facts to counter my argument that expecting somewhat similar returns by paying interest on a 401k loan is foolish?

 

[Rage187]

I've had 17% returns this year on my 401k. 25% in BA stock but $120 is almost a given for eoy.

I have 3k in credit card debt. 19k in car debt. One car paid off. My biggest expense is school for my eldest. I want to put her in public school, but we had to put her in private near the in laws so they could take her and pick her up.

If I don't move, in 3 years, the private school tuition doubles when my 2nd kid starts going. Two kids going is a mortgage payment. The plan is to move and get them in a public Montessori within 2 years.

Our gas bills for driving, energy bill on the new house will help.

I also haven't adjusted my witholdings for the 2nd child.

I can make it happen, I was just hoping there was a one and done way of doing it.

 

[alkemyst]

Tons? If you look at Vanguards website there is *1* stock
fund out of 43 that did worse than 5.85%. Out of ALL 340 Fidelity funds
offered only 73 returned less than 4.5%. Out of 191 stock funds only 7
returned less than 4.5%. Hell - T. Rowe Price doesn't have a single stock
fund that returned less than 9% last year.

Perhaps your definition of 'tons' differs than mine but I don't consider
3% of stock funds offering gains of less than 4.5% to be 'tons of funds
doing worse than 4.5%'

Thats even beside the point - my selection of VTSMX was just to show that
there are many (the majority this year) of cases where a return of 4.5% is
not going to be similar to gains in the market buy picking something that
mimicked the market. If I wanted to cherry pick I would have gone with
FBIOX which returned 52%

bro, not everyone has vanguard funds in the portfolio the company offers.

Pat yourself on the back you and me have extra money to spend.

 

[rcpratt]

Is it really a loan if you are making payment out of one of your accounts?

...yes?

A smart person would maximize his 401k contribution instead putting dollars into .75% savings account.

Not sure who said this or how it's relevant.

 

[postmortemIA]

...yes?


Not sure who said this or how it's relevant.

It is relevant. The reason why op has no cash is that he invested everything left over into 401k, so thus no much savings. A savings account pays less than a percent in return. By having all that dollars in 401k, he should use no tax loan for big purchases like home. Ans maybe one more major thing. So even if growth of 401k is reduced while he is repaying loan it is still way better than using savings account for major purchases.

 

[rcpratt]

It is relevant. The reason why op has no cash is that he invested everything left over into 401k, so thus no much savings. A savings account pays less than a percent in return. By having all that dollars in 401k, he should use no tax loan for big purchases like home. Ans maybe one more major thing. So even if growth of 401k is reduced while he is repaying loan it is still way better than using savings account for major purchases.

Let's not act like he's been socking away every penny in his retirement accounts. $80k at 36, while better than most of the idiots in this country, is well behind the curve for where somebody with his (assumed) income should be. It's not like he's incredibly retirement-rich right now.

The issue is spending, and the inability to control it.

 

[Exterous]

So do you have any facts to counter my argument that expecting somewhat similar returns by paying interest on a 401k loan is foolish?

bro, not everyone has vanguard funds in the portfolio the company offers.

So...no then. Got it. Why do you keep sticking with Vanguard? Pick a major fund provider and I am willing to bet most of their stock funds returned more than 4.5% (Unless its a precious metals only company)

 

[shadow9d9]

You keep acting like buying a house you clearly can't afford is your only option... Rent, stop the private school, and start saving, both inside and out of your retirement. At this rate, you will not only not retire, but also not be able to help your kids through college.

 

[HardcoreRobot]

my advice is to wait to buy until you have saved up the down payment

 

[NoCreativity]

The issue is spending, and the inability to control it.

With the CC debt, the car loan and the 401K loan I think that is a pretty accurate assessment.

That said, it sounds like part of the reason for moving is to cut his expenses. So it is probably beneficial for the OP to take a hit now, whether in his retirement account or a non-retirement investment in order to make the move. That is of course with the caveat that he puts much of the money he will save towards retirement.

 

[Exterous]

The reason why op has no cash is that he invested everything left over into 401k. A savings account pays less than a percent in return.

Sure, after making payments on the last loan, spending thousands on a credit card and making his car payments

Lets also not forget that a 401k can pay negative returns. A savings account trades stability for potential gains. 2008 is why you have a stable savings account instead of depending on a 401k loan in the future. Then you have fun little rules about repayment times if you leave the company\get fired\go on disability or rules restricting contributions while there is an outstanding loan

I've had 17% returns this year on my 401k. 25% in BA stock but $120 is almost a given for eoy.

I have 3k in credit card debt. 19k in car debt. One car paid off. My biggest expense is school for my eldest. I want to put her in public school, but we had to put her in private near the in laws so they could take her and pick her up.

If I don't move, in 3 years, the private school tuition doubles when my 2nd kid starts going. Two kids going is a mortgage payment. The plan is to move and get them in a public Montessori within 2 years.

Our gas bills for driving, energy bill on the new house will help.

I also haven't adjusted my witholdings for the 2nd child.

I can make it happen, I was just hoping there was a one and done way of doing it.

I get the appeal of getting the house now. Low property rates + low interest rates makes it look very attractive and it can be a good long term decision. But stretching yourself is how so many americans got themselves in trouble during the recession. The 'Oh I'll pay that back later' mentality screwed many of them and your spending habits (One loan already, credit card debt and a $19k car loan) make me concerned that this may not be a good idea for you. Not to mention how terrible people are at actually saving or repaying when 'tomorrow' arrives

How long will it take you to repay the loan? Don't forget your company may have rules like you must repay the entire loan within 60 days if you leave the company\are fired\go on disability or you may be unable to contribute while you have an outstanding loan.

A balance transfer will probably get you 12-18mo at 3%, a HELOC will be around 4.5% for longer, a 401k loan will be around 4.5% that you pay yourself but you could lose out on a large 401k return (For example if you did this last year the 401k loan would have been the worst option by about 10%). There are pluses and minuses to all of them so be very careful and make an informed decision if you decide to go ahead and take on more debt.

Any may cause issues with your Mortgage approval so talk to them before deciding and rule out any they say will disqualify you

 

[Elbryn]

so here's a question to throw out for helping to mitigate the potential damage done to a 401k with a loan. assuming the payback rate is 4-5%. say you got a classic 75/25 stock/bond allocation. if you need to take a loan out, adjust your allocation to make the loan come out of the bond allocation.

this way you can simulate a stable value-esque return and not suffer the potential bigger equity return.

you still lose as a whole because you're dedicating future earned income which ideally could be net new contributions to start earning compound interest on but you also dont lose out on the potential equity gains.

 

[JTsyo]

Would you pay back the loan when the first house is sold? That might not leave much time to worry about lose of future earnings.
I think you guys are missing out on the fact that he has the equity in the first house and just needs something to cover the down payment until the house is sold. Another option is would any family members help with the knowledge that the house would be sold soon?

 

[Rage187]

Would you pay back the loan when the first house is sold? That might not leave much time to worry about lose of future earnings.
I think you guys are missing out on the fact that he has the equity in the first house and just needs something to cover the down payment until the house is sold. Another option is would any family members help with the knowledge that the house would be sold soon?

Yes, we will pay the loan back with the equity from the current house, but will knock out the credit card debt first. The only new appliances we will have to purchase is a fridge and washer/dryer.

Blinds, ceiling fans and the like are already taken care of.

 

[Legios]

I can see where people are saying don't rob Peter to pay Paul. You are pulling from your 401k to help with the down payment but still don't get it to 20% thus avoiding PMI?

We were able to do 10% down right away and finance 90/10 with the 10 being an equity loan which we easily paid off 3 weeks after close as the sale money from our first house came in. Why the resriction on having 2 loans?

 

[alkemyst]

I can see where people are saying don't rob Peter to pay Paul. You are pulling from your 401k to help with the down payment but still don't get it to 20% thus avoiding PMI?

We were able to do 10% down right away and finance 90/10 with the 10 being an equity loan which we easily paid off 3 weeks after close as the sale money from our first house came in. Why the resriction on having 2 loans?

harder to get now.