T Nation

401k Help


#1

I need some advice on what to do about my 401k. Ideally, I would keep it growing as it is being matched by my employer. However, I have an opportunity to help my father-in-law get his business off the ground. It would be an investment to become part owner, and he doesn't have the money to get going on it. He moved to this country 10 years ago with his family and has had trouble getting stable work.

I have about 40,000 in my 401k and I want to use it for him, but I am a little confused on what I will actually take out and what will go to the government (penalties, fees, etc). He really needs about 20,000 to get started. Is there a better way to go about doing this?


#2

[quote]honest_lifter wrote:
Is there a better way to go about doing this?[/quote]

Yes, get the 20k some other way.

Don’t raid your retirement.

You’ll pay the 10% penalty plus be taxed on whatever you take out at ordinary rates.


#3

Agreed - let he him find another way to get his business going. Not only are you putting your retirement at risk but you are setting yourself up for a double kick to the balls from our government of paying a 10% early withdrawal penalty and paying ordinary income tax on the amount pulled out.


#4

[quote]honest_lifter wrote:
I need some advice on what to do about my 401k. Ideally, I would keep it growing as it is being matched by my employer. However, I have an opportunity to help my father-in-law get his business off the ground. It would be an investment to become part owner, and he doesn’t have the money to get going on it. He moved to this country 10 years ago with his family and has had trouble getting stable work.

I have about 40,000 in my 401k and I want to use it for him, but I am a little confused on what I will actually take out and what will go to the government (penalties, fees, etc). He really needs about 20,000 to get started. Is there a better way to go about doing this?[/quote]

At your employer’s discretion you may be able to take a loan from your 401k and not have to pay any penalties. That being said, long-term it is a bad idea and you would be better off finding it somewhere else.


#5

Do not take a loan out from your 401(k)…


#6

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?


#7

Why not take out a business loan?


#8

If you lose your job, it must be repaid within 60 days or you take the full tax and penalty hit. It’s a nice thing you are doing, but not wise. If at all possible, find another way. Co-signing a business loan for him (ordinarily another very bad idea) would be a better option. Your long term financial position takes first priority and your retirement is not something you should screw around with.

Most financial advisors discourage borrowing from a retirement plan unless the risk of repayment is very low or the loan is your last resort. Yes, there are advantages, but the downside risk is big. If you do this, get a lawyer to draw up a state-specific promissory note that will protect you legally. Don’t use an internet form. Whatever you decide, hope it works out for you.


#9

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?[/quote]

You will lose out on years of compounding interest, it has to be paid back within certain parameters, and the chances of losing the money on a small business investment are pretty high. That, imo, is a poor reason to borrow from you 401(k). The purpose of a 401(k) is retirement savings not high risk investing. I would only take a 401(k) loan out in an emergency situation my emergency fund can’t cover. That’s pretty much it. Not to buy a pool, not to buy a car, and not to invest in a business that will likely fail.


#10

[quote]usmccds423 wrote:

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?[/quote]

You will lose out on years of compounding interest, it has to be paid back within certain parameters, and the chances of losing the money on a small business investment are pretty high. That, imo, is a poor reason to borrow from you 401(k). The purpose of a 401(k) is retirement savings not high risk investing. I would only take a 401(k) loan out in an emergency situation my emergency fund can’t cover. That’s pretty much it. Not to buy a pool, not to buy a car, and not to invest in a business that will likely fail.
[/quote]

You’d have to do the math based on expected return … basically, if the IRR is 0 over the life of the loan compared to if you left the money in the 401k then it’s a wash (based on expected return rate which is really just an estimated guess). It’s a lot of work when a business loan of $20,000 will do and probably cost you less in the long run (in terms of lost returns).


#11

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?[/quote]

You will lose out on years of compounding interest, it has to be paid back within certain parameters, and the chances of losing the money on a small business investment are pretty high. That, imo, is a poor reason to borrow from you 401(k). The purpose of a 401(k) is retirement savings not high risk investing. I would only take a 401(k) loan out in an emergency situation my emergency fund can’t cover. That’s pretty much it. Not to buy a pool, not to buy a car, and not to invest in a business that will likely fail.
[/quote]

You’d have to do the math based on expected return … basically, if the IRR is 0 over the life of the loan compared to if you left the money in the 401k then it’s a wash (based on expected return rate which is really just an estimated guess). It’s a lot of work when a business loan of $20,000 will do and probably cost you less in the long run (in terms of lost returns).[/quote]

Sure, I would probably use NPV over IRR, but your point stands. The larger issue for me is the risk involved with the investment into a small business especially because OP has to pay the loan back and/or eat the penalty. If OP had $20K cash, I’d say go for it.


#12

[quote]usmccds423 wrote:

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?[/quote]

You will lose out on years of compounding interest, it has to be paid back within certain parameters, and the chances of losing the money on a small business investment are pretty high. That, imo, is a poor reason to borrow from you 401(k). The purpose of a 401(k) is retirement savings not high risk investing. I would only take a 401(k) loan out in an emergency situation my emergency fund can’t cover. That’s pretty much it. Not to buy a pool, not to buy a car, and not to invest in a business that will likely fail.
[/quote]

You’d have to do the math based on expected return … basically, if the IRR is 0 over the life of the loan compared to if you left the money in the 401k then it’s a wash (based on expected return rate which is really just an estimated guess). It’s a lot of work when a business loan of $20,000 will do and probably cost you less in the long run (in terms of lost returns).[/quote]

Sure, I would probably use NPV over IRR, but your point stands. The larger issue for me is the risk involved with the investment into a small business especially because OP has to pay the loan back and/or eat the penalty. If OP had $20K cash, I’d say go for it. [/quote]

Agree … It didn’t seem like the risk was much of a factor for the OP … I’m curious what the expected return on the business would be…i.e. opportunity costs


#13

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?[/quote]

You will lose out on years of compounding interest, it has to be paid back within certain parameters, and the chances of losing the money on a small business investment are pretty high. That, imo, is a poor reason to borrow from you 401(k). The purpose of a 401(k) is retirement savings not high risk investing. I would only take a 401(k) loan out in an emergency situation my emergency fund can’t cover. That’s pretty much it. Not to buy a pool, not to buy a car, and not to invest in a business that will likely fail.
[/quote]

You’d have to do the math based on expected return … basically, if the IRR is 0 over the life of the loan compared to if you left the money in the 401k then it’s a wash (based on expected return rate which is really just an estimated guess). It’s a lot of work when a business loan of $20,000 will do and probably cost you less in the long run (in terms of lost returns).[/quote]

Sure, I would probably use NPV over IRR, but your point stands. The larger issue for me is the risk involved with the investment into a small business especially because OP has to pay the loan back and/or eat the penalty. If OP had $20K cash, I’d say go for it. [/quote]

Agree … It didn’t seem like the risk was much of a factor for the OP … I’m curious what the expected return on the business would be…i.e. opportunity costs[/quote]

For some reason I don’t think a lot of people consider the risks involved in something like this all that much.

I’d also want to know how long before my investment begins to pay off/out. It’s not uncommon for a small business to operate at a loss for the first year or two, finally break even, and then start to turn a profit. It could be 5 years (of lost interest) before the OP sees a return.


#14

[quote]usmccds423 wrote:

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?[/quote]

You will lose out on years of compounding interest, it has to be paid back within certain parameters, and the chances of losing the money on a small business investment are pretty high. That, imo, is a poor reason to borrow from you 401(k). The purpose of a 401(k) is retirement savings not high risk investing. I would only take a 401(k) loan out in an emergency situation my emergency fund can’t cover. That’s pretty much it. Not to buy a pool, not to buy a car, and not to invest in a business that will likely fail.
[/quote]

You’d have to do the math based on expected return … basically, if the IRR is 0 over the life of the loan compared to if you left the money in the 401k then it’s a wash (based on expected return rate which is really just an estimated guess). It’s a lot of work when a business loan of $20,000 will do and probably cost you less in the long run (in terms of lost returns).[/quote]

Sure, I would probably use NPV over IRR, but your point stands. The larger issue for me is the risk involved with the investment into a small business especially because OP has to pay the loan back and/or eat the penalty. If OP had $20K cash, I’d say go for it. [/quote]

Agree … It didn’t seem like the risk was much of a factor for the OP … I’m curious what the expected return on the business would be…i.e. opportunity costs[/quote]

For some reason I don’t think a lot of people consider the risks involved in something like this all that much.

I’d also want to know how long before my investment begins to pay off/out. It’s not uncommon for a small business to operate at a loss for the first year or two, finally break even, and then start to turn a profit. It could be 5 years (of lost interest) before the OP sees a return. [/quote]

Again agree … On average about 70 percent to 80 percent of businesses fail in 10 years (from Entrepreneur.com) That’s a lot of risk [b]BUT[/b] that’s also a lot of time to gain some great experience in the start up world/running a small biz.


#15

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]polo77j wrote:

[quote]usmccds423 wrote:

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.

OP, Can you maintain your regular contribution and make the payment to a 401k loan? Is the 401k loan an option to you?[/quote]

You will lose out on years of compounding interest, it has to be paid back within certain parameters, and the chances of losing the money on a small business investment are pretty high. That, imo, is a poor reason to borrow from you 401(k). The purpose of a 401(k) is retirement savings not high risk investing. I would only take a 401(k) loan out in an emergency situation my emergency fund can’t cover. That’s pretty much it. Not to buy a pool, not to buy a car, and not to invest in a business that will likely fail.
[/quote]

You’d have to do the math based on expected return … basically, if the IRR is 0 over the life of the loan compared to if you left the money in the 401k then it’s a wash (based on expected return rate which is really just an estimated guess). It’s a lot of work when a business loan of $20,000 will do and probably cost you less in the long run (in terms of lost returns).[/quote]

Sure, I would probably use NPV over IRR, but your point stands. The larger issue for me is the risk involved with the investment into a small business especially because OP has to pay the loan back and/or eat the penalty. If OP had $20K cash, I’d say go for it. [/quote]

Agree … It didn’t seem like the risk was much of a factor for the OP … I’m curious what the expected return on the business would be…i.e. opportunity costs[/quote]

For some reason I don’t think a lot of people consider the risks involved in something like this all that much.

I’d also want to know how long before my investment begins to pay off/out. It’s not uncommon for a small business to operate at a loss for the first year or two, finally break even, and then start to turn a profit. It could be 5 years (of lost interest) before the OP sees a return. [/quote]

Again agree … On average about 70 percent to 80 percent of businesses fail in 10 years (from Entrepreneur.com) That’s a lot of risk [b]BUT[/b] that’s also a lot of time to gain some great experience in the start up world/running a small biz.[/quote]

Ya, without a doubt.


#16

[quote]tedro wrote:

[quote]usmccds423 wrote:
Do not take a loan out from your 401(k)…[/quote]

Why not? For the financially prudent a 401k loan can be a great deal and this opportunity may fit the bill.

Typical 401k loans allow you to take 50% of the balance, which is exactly what OP needs. You’ll probably pay around 5% interest back to yourself while you pay back the loan. The key is to not decrease your regular contribution to pay back the loan. If you can maintain your typical contribution rate and add in the after tax payback, the 401k loan is a great way to borrow from your retirement accounts instead of a bank.
[/quote]

While you are, without question 110% correct. The average person is not prudent. Shit, I can show you example after of example of people making anywhere from 250k a year to 15m and still have shit and live a life style based on debt, because they suck with money. (Some of these people are in finance and investing… Think about that.)

My default recommendation is "don’t touch your 401(k), mainly because anyone I would suggest that to, has done enough research and math to figure out if it’s a good plan or not, and presents the question with significantly more details.


#17

First off, never let the inlaws what you have in the bank, 401k and so on. Your wife should be onboard with this too.

Early withdrawal from a 401k comes with an approximate 40% penalty. So to get $20,000, you need to take out a bit over $33,000.

As far as a loan goes, this can vary from plan to plan. To take out a loan for $20,000 can be risky, plus it slashes your investing power by 50%. How many years do you want to pay it back, and is the father inlaw making payments to you?

Risky from what I see and your wife’s opinion/ influence is paramount in the outcome.


#18

So many awesome things here that I never even thought about. I read all the posts and I really appreciated all of the comments!

To offer more details

  1. RE: 401k loan. I took one of these out (10,000) when I bought my house. I was able to maintain my lifestyle (I am frugal, if not flat out cheap, thanks Dad!) while paying back that loan, which I completed about 1 year ago. I completely didn’t even think about this as an option again.

  2. My father-in-law is an extremely hard worker and, right next to my dad, someone I admire very much in that department. My wife is 100% behind the idea of taking out the money from the 401k. However, that has more to do with her loving her father very very much and less to do with whether it is business savvy; she relies on me for that.

  3. I am expecting a partnership (something around 50/50 or 45/55 favoring him) on this business venture and I was viewing it as exactly what it is, an investment. That being said, when it comes time to coughing up the money, there will be some long discussions with him about how we can make this work and what the plans are on this. I don’t expect him to pay me back the money at all; thus the partnership.

  4. RE: Business loan. Never even considered one of these. I know nothing of them and will need to do research to find out more.

  5. Any thoughts on doing a house mortgage loan? I bought my house on a short sale for 99,000 and it is valued around 155,000. I owe about 65 on it now. Are these loans dangerous, financially speaking?


#19

I think you should definitely raid your retirement to go into business with your father in law, who can’t get steady work.

What could go wrong?


#20

[quote]honest_lifter wrote:
So many awesome things here that I never even thought about. I read all the posts and I really appreciated all of the comments!

To offer more details

  1. RE: 401k loan. I took one of these out (10,000) when I bought my house. I was able to maintain my lifestyle (I am frugal, if not flat out cheap, thanks Dad!) while paying back that loan, which I completed about 1 year ago. I completely didn’t even think about this as an option again.

  2. My father-in-law is an extremely hard worker and, right next to my dad, someone I admire very much in that department. My wife is 100% behind the idea of taking out the money from the 401k. However, that has more to do with her loving her father very very much and less to do with whether it is business savvy; she relies on me for that.

  3. I am expecting a partnership (something around 50/50 or 45/55 favoring him) on this business venture and I was viewing it as exactly what it is, an investment. That being said, when it comes time to coughing up the money, there will be some long discussions with him about how we can make this work and what the plans are on this. I don’t expect him to pay me back the money at all; thus the partnership.

  4. RE: Business loan. Never even considered one of these. I know nothing of them and will need to do research to find out more.

  5. Any thoughts on doing a house mortgage loan? I bought my house on a short sale for 99,000 and it is valued around 155,000. I owe about 65 on it now. Are these loans dangerous, financially speaking? [/quote]

I’m not a financial professional and some other posters might have better advice but I do know a thing or two from experience and reading (a lot of reading). I would NOT borrow against your house for a business loan. The business should be collateral enough, from my understanding. If the business fails, then your housing is at risk - so basically it’s a double whammy - your means of income goes and now your house does too. Look into the business loan and setting up and LLC or soemthing of the sort where you’re liability is limited (again, someone here could probably be a lot more succinct regarding this than me).