Strategically taking a 401k loan and/or no-penalty withdrawal

[Libertarian666]

You take the money out of the account and pay tax on it, fair because you didn't pay tax on it going in.

For a loan you do not pay tax when you withdraw.

Ah right. That would be triple tax then.

You still pay the loan back with after tax money, correct? Or do you pay it back with pre-tax deductions? If the former, that's double taxation.

A tax holiday for a $25K withdrawal from a 401K would be awesome though.

There is no double taxation on 401k loans.

Let's do a thought experiment.

Scenario A:
1. You have $100,000 in your 401k.
2. Later you withdraw $50,000. Tax owed: whatever it is on $50k at your tax bracket then.

Scenario B:
1. You have $100,000 in your 401k.
2. You borrow $50,000 from it. Tax owed: 0.
3. You immediately repay the $50,000 to it. Tax owed: 0.
4. Later you withdraw $50,000. Tax owed: whatever it is on $50k at your tax bracket then.

Where's the double taxation?

[mathjak107]

There is never double taxation except on interest...

It is a Susie ormann myth ...she used to tell her band of financial misfits it was double taxed to talk them out of it .....

[Libertarian666]

There is never double taxation except on interest...

It is a Susie ormann myth ...she used to tell her band of financial misfits it was double taxed to talk them out of it .....

Yes, that always irritated me.
But she probably did more good than harm if she talked them out of taking loans to go on vacation or the other stupid things they wanted to spend money on.

[Libertarian666]

It's fun to look back, on your younger years, and realize you destroyed $37,000 worth of Beanie Babies by blowing them apart with fireworks.

How could you have known then that they would have a place in the Permanent Portfolio, right next to Bitcoin?

[mathjak107]

There is never double taxation except on interest...

It is a Susie ormann myth ...she used to tell her band of financial misfits it was double taxed to talk them out of it .....

Yes, that always irritated me.
But she probably did more good than harm if she talked them out of taking loans to go on vacation or the other stupid things they wanted to spend money on.

I agree ...she really did tell the truth ...it is double taxed ...she just doesn’t point out the fact you kept the untaxed money to offset.. as far as her financial misfits go they just take it at face value and believe her

[CT-Scott]

Since this was enacted there have been several articles posted which all basically say the same thing (experts say taking a loan or withdrawal from your 401k should be a last resort). All of them tend to include a quote from some expert who says something like, "You'll miss out on the interest your money would have earned." Well, they're usually talking about stock funds, and that assumes that the stock market will go up. If you think there's a higher likelihood in the short/med/long-term that the stock market will be going down, then you're "rescuing" that chunk of money by withdrawing it.

But here's one opinion piece that goes against the norm:

Given Current Rates, Cashing Out Your 401(k) To Pay Off Your Mortgage Can Make You A Bundle
https://www.forbes.com/sites/kotlikoff/ ... 34159b09b5

It's a fun read. Take a look and let me know what you think about his take.

[mathjak107]

for one thing he says " Finally, three caveats. Mortgages are good hedges against inflation. If prices rise, we get to pay off our mortgage in watered-down dollars. The Fed is printing lots of money these days. If it keeps doing so, it's possible that we could move from very low inflation to substantial inflation. If you pay off your mortgage, you lose that hedge. "

this is not correct .... what we buy is the hedge against inflation ... mortgages are neutral .... your house has the same inflation protection with a mortgage or without . if you invested in bonds with the mortgage money and inflation strikes you have zero inflation hedge .......

when we have choices of paying off or taking a mortgage vs using our own money to invest while taking or keeping a mortgae , we are actually borrowing to invest .... it is what we buy that is the hedge not the mortgage

.

there are many assumptions in there that have no financial logic to it.

the 401k should be long term money ...there is no financial logic to mitigating short term temporary dips in markets with bonds as a long term investor in a 401k and permanently hurting long term returns . so to compare to treasuries in a 401k i got give a thumbs down ... you certainly can't compare to a down year in the stock market either and make a strategy out of it ...... unless i was not going to be very high equity levels in my 401k i fail to see any financial logic in this . bonds in a portfolio that is ear marked for the long term makes sense only as a mental thing not a financial thing .

bonds are for when you have time constraints on the money or are gun shy . they are not for when you have decades to go in your accumulation stage in my opinion .

the author is well know for social security advice ... unfortunately i think he should stay in that segment and not try to write articles in other areas ....




https://www.kitces.com/blog/why-a-mortg ... -that-are/

[CT-Scott]

Thanks for the reply mathjak. I read the article you linked to, but must admit that I had trouble following it. I will say that I have a lot of trouble reading/interpreting columns which discuss inflation, because they're usually talking about perceived/visible inflation (I think there's an actual term for what I'm talking about), rather than the simple act of the Fed printing dollars, which I understand to be the true definition of inflation. The Fed is printing a lot of dollars now, so we should have a lot of real inflation right now, but we may not "see" it in terms of prices going up. Also, the government likes to play with their definition of inflation so as to reduce how much they adjust various payouts which are supposed to keep up with inflation.

Most articles which give financial advice also seem to make these two assumptions:
1) The stock market will always rise, given enough time. While this may have always proven true, it's still speculative (no one can predict the future, and Rome fell). But it's also a diversion, because humans don't live forever, and many of us aren't concerning ourselves with wanting to leave a legacy for our children and grandchildren, but simply are trying to attain enough to retire or FIRE or the variation where I continue to work for as long as possible, but do something I love more than what I'm currently doing. And so, even a short/medium-term stock market crash can damage those plans.
2) Houses are an appreciating asset. There was once a time when someone could buy a house for $25K and see it become worth 10x or more of that in their lifetime. I'm not convinced that that's the reality anymore. We saw a pretty big crash in housing values about 10 years ago and my town (which is actually considered to be a very desirable town with excellent schools and above-average income residents) hasn't seemed to really recover much above those pre-crash values. I guess I'll know much better when I have my house ready to sell and see what sort of offers come in. But since buying it 12 years ago, we've also dumped a *LOT* of money into it (new roof, new driveway, added central A/C, and several more things). So I'm of the current opinion that I don't see my house as an asset at all, but simply a place that I'm renting. I still prefer to "own" than to rent, because I can get a nicer place. But I view the bank (and town) as the real owners, and I think I'd just as soon secure a low interest long-term mortgage (or possibly even an ARM if I think rates will remain low longer-term) to pay the least "rent" on it.

On that last note, the article you linked to also assumed a fixed rate mortgage. I'm wondering how some of his examples would look with an ARM. He also seemed to assume that rising perceived/visible inflation would coincide with rising house values. Is that necessarily a safe assumption?

[mathjak107]

Well I can tell you the second home we had at one time in the pocono mountains is worth less today then when we sold in 2012 ....so real estate is highly localized and can not be generalized

[mathjak107]

Anytime we choose to invest money we have as opposed to paying off a mortgage or taking a mortgage , in effect is using borrowed money to invest ....most who do it don’t realize they are buying equities leveraged .....they don’t see it in the proper perspective .

So it is not the same as just investing our money , having a mortgage and choices in not having one is investing leveraged money .


So if you are investing using leverage don’t you want a risk premium for taking the extra risk over just investing ? I sure would .....in my opinion the risk premium in a balanced portfolio is not great enough to warrant doing it .....unless I was leveraging 100% equities I would not keep the mortgage or take a mortgage.

I would never follow the advice in that article

[CT-Scott]

So if you are investing using leverage don’t you want a risk premium for taking the extra risk over just investing ?

But the house is itself a risky "investment" as you demonstrated with your Poconos home example. One factor that can be significant, but which varies from state to state, is whether you live in a no-recourse state. My state (CT) is a no-recourse state. So that likely factors into my perspective of not wanting to pay off a mortgage early or put a larger down payment on it. If the housing market crashes, my house goes underwater, and I have an ample cash reserve, I can choose to move into a rental (or buy a discounted house), and then hand over the keys to my underwater house.

[mathjak107]

Like I said real estate is very localized ....in fact even the same location can vary greatly .....our manhattan real estate did fabulous , it was an amazing deal ...on the other hand our real estate in kew gardens queens , meh , nothing to write home about