Raiding 401k for RV Purchase

[Bumps]

But I always consult iRV2 for my financial advice! LOL! Thanks! \ken

[RBeau1954]

Ken, you are right on all accounts except the tax deduction, there is no tax advantages to the interest because you are paying it to yourself. Contact your plan administrator about the terms and conditions of your 401k. We just did it this summer so I know how it works, we set it up for a 5 yr loan and the money is taken directly out of my paycheck. There was a one time $75.00 processing fee to do the loan. Also, I turned 59 1/2 earlier this year and was able to rollover the portion of the 401k that I contributed to my account. I rolled it over to a Scottrade account so I could invest it into whatever I wanted instead of the few investments that the plan offered. After 59 1/2 you can withdraw the money with no penalties but it is treated as income and have to declare it as such and pay taxes on it. We have done this several times so I know how our plan works. You first need to talk to the plan administer about what your plan is.

[ahicks]

The part that kicked my butt, maybe not the same with all 401 plans, was that I was 60, and retired/no longer working, therefor not making regular 401k contributions. At that point, I'm free to make withdrawals of course, but contributions to replace money withdrawn, were not an option over a period of time. I think the limit was 90 days? That's the piece that caught me off guard....

[JMonroe]

If you roll the money over into an IRA you loose options, such as - you will not be able to take anything out before 59 1/2 without penalty (taxes will always apply). The laws relative to the handling of a 401k plan and an IRA are a bit different. I retired at 57 but left the funds in my former employers 401k plan for just that reason, for a couple of years.

If I remember correctly, you can actually make no penalty withdrawals after age 50, if you've retired from the company with which you had the plan, but only from that company's plan (if you had others with former employers I think you are barred from making no penalty withdrawals from them - I may be wrong).

Personally, I'd consider that 401k sacred and unavailable until I actually retired, barring some real emergency (as provided for in the law). No one has ever complained about having too much money in their retirement savings, once they were dependent on them, but you will hear many stories from those that ended up living on Social Security. I know the loan and paying yourself interest may be enticing, but its too easy to later decide not to follow through with the payments.

[Triker56]

Hmmmm … Something doesn’t smell right to me. What am I missing?

You are paying the loan back with money that taxes have already been paid for.
Then when you withdraw any 401K the next time, you get to pay taxes again on the $$$ payback including the interest paid.

Borrow from a bank etc and deduct the interest from your taxes.
No tax deduct from your 401K loan pay back or interest paid. :(

Been there done that once.

[Craig_R]

I once took a $2K loan against my 401K to go to school. This was quite a few years ago, but if I remember correctly, the purpose of my loan had to stand up to the scrutiny and approval of the plan administrator. Secondly, when the loan was approved and I received the money, the balance of my 401K did, in fact, decrease by the $2K that I borrowed from it. Everything else that's been said was true at that time. The loan payment was deducted from my paycheck every month and I did pay it back to myself at an interest rate of 6%. This was just my experience with my employer's 401K back in the early 90s. Yours may be different.

[TexasTom]

Nice to be able to give back to this great community.

There are several different 401K plans, you need to read yours carefully, Generally its' 59 1/2 before you can withdraw w/o penality however this is plan specific, So you need to read the plan.
The ability to pull money from a 401(k) plan after you have separated from service at age 55 with no penalty (tax will apply) is statutory under 72(t) and applies to all plans. It is not uncommon to not see anything in the document with that reference.

a) If you are 55 or older, and, usually don't have to be over 55 to borrow
b) You borrow from your 401(k) in order to purchase a motorhome, and,
c) You pay back the loan.

Then…

• There are no IRS penalties associated with the loan? correct
• There are no taxes on the proceeds from the loan? correct, as long as you pay it back timely
• The interest that you are charged for the loan you are actually paying back to yourself (so that is income to your 401(k) plan)? correct
• And in addition to interest income from the loan, you are still earning interest on the original investment balance? Generally no, because that money is paid out to you. It is more like a distribution that you slowly pay back.
• And the interest that you pay to yourself is tax deductible as mortgage interest? CPA's & Attorneys have opined this is true only if the plan that is providing the loan holds the property as collateral for the loan. And I have never seen that done .
• And (if unemployed) while you are paying back the loan, you can be withdrawing funds (taxable, of course) in order to make the payment on the loan? Never thought of that procedure. As long as it is within the permitted distribution process I don't see why not!

You are paying the loan back with money that taxes have already been paid for. Then when you withdraw any 401K the next time, you get to pay taxes again on the $$$ payback including the interest paid. This is a fabulous point that is missed by most. You pay interest back with money that has already been taxed. Then when you take the eventual distribution you pay tax on it again.

[missourijan]

Suze Orman would say no way, don't do it, no way. Your 401k is an appreciating asset, an rv is a depreciating asset. Don't want to offend but if you need to withdraw $$ from your 401k to buy an rv maybe you can't afford it. Suze has discussed this topic many times on her CNBC show on Saturday nights, maybe there is a discussion on her website.

[sknight]

Nonononononononononononononononononononononononono nonononononoononononononononononononononononononon onononononononononononoononononononononononononono nononononononononononononononononoonononononononon ononononononononononononononononononononononononon onononononononono!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Don't touch it! That's money that is generating income, now and in/for your future. Taking it out to buy a motorhome, which will not only stop the income from those dollars but will be put into something that will depreciate is a double hit of bad.

If you're going to finance some or most of it anyway leave those dollars working for you and just finance it. Pay it off early as you can, you said you have 10 years left to work, use that time paying it off.

[Craig_R]

I missed the part about still having 10 years to work. I was looking at it from a full time perspective.

If that's the case then the RV is a toy, not your home. One of the first rules of sound financial management is that you do not finance toys. Leave the 401K alone and let it grow for you. Just my 2 cents. That and a bus token will get you across town.

[Bumps]

Thanks, girls/guys! I truly appreciate all of the guidance and perspective.

My mistake [perhaps] is that 95% of my retirement monies are in one investment vehicle: my 401(k). Not enuf cash on-hand to pay for the coach outright. So [two of] my options for coming up with $$$ for a new coach are to take a large, taxable withdrawal, or a small non-taxable loan. I'd rather not have to pay all of those taxes.

Third option is to use some of the money from the sale of my S&B, but that is my exit strategy from FTing ... so I don't want to use that.

I'm gonna have to sneak this series of questions into the next conversation with my CPA. You've given me a lot of food-for-thought!

Sorry to hi-jack the thread ... But Many Thanks!

\ken

[Bumps]

PS. I remembered that there is a Fourth Option: Do nothing. We can always keep the MH that we have, I guess! \ken

[sknight]

Originally Posted by Bumps

PS. I remembered that there is a Fourth Option: Do nothing. We can always keep the MH that we have, I guess! \ken

Or don't upgrade as much. Sell what you have (Always better than trading unless you really hit at the right time.) then buy something more affordable, when you sell the S&B sell the MH you have and go get something banging!

[hammer55]

curious, what does a IRA pay these days of government intervention into our financial system, other than differed tax,
or is that a different thread altogether