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CARES act - Borrowing from 401k

FutureInternist

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Based on my reading, it seems that the CARES act allows you to borrow up to 100K from retirement account, which then has to be paid back within 5 years.

There is no penalty for early withdrawal and while you do pay interest, it is to your own retirement account, actually allowing you to contribute more than the $19,500 max.

I have approx 300K in my accounts combined (403b and 401A) as well as additional $ in 457. (Not touching Roth IRA, or HSA)

Medical school loans are at 4.75%, whereas the retirement account loan rate will be 4.25%.

I have started a new job that is for profit so below is my plan -

1. Roll over 403b and 401A into new job’s 401k.
2. Take my distribution for my 457b from old job as a lump sum (since my income is smack in the middle of a range, this will not push me into the next bracket, and taking it in installments will not drop me into a lower bracket)
3. Use the lump sum $, after taxes, and borrow remaining from new 401k to pay off entirety of medical school loans.
4. Contribute 19k to new job’s 401k, while also contributing (approx) 20K per year to paying back the loan (this will not decrease my take home by any measureable amount, since I was already contributing 19K - although pre-tax - to my old job’s 457.)
5. Continue to contribute towards my Roth IRA and HSA (these will not be affected)

OR
1. Buy lottery tickets

I realise that I may (or likely will) get a higher rate of return if I left the 100K in 401K, but assuming a 7% return (vs the 4.5%) I would stand to “lose” approximately $16K over 5 years which to me seems worth the mental relief of getting this monkey off my back.

Thoughts?
Is this completely insane... or just mildly insane?

Thanks
 
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dpmd

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Based on my reading, it seems that the CARES act allows you to borrow up to 100K from retirement account, which then has to be paid back within 5 years.

There is no penalty for early withdrawal and while you do pay interest, it is to your own retirement account, actually allowing you to contribute more than the $19,500 max.

I have approx 300K in my accounts combined (403b and 401A) as well as additional $ in 457. (Not touching Roth IRA, or HSA)

Medical school loans are at 4.75%, whereas the retirement account loan rate will be 4.25%.

I have started a new job that is for profit so below is my plan -

1. Roll over 403b and 401A into new job’s 401k.
2. Take my distribution for my 457b from old job as a lump sum (since my income is smack in the middle of a range, this will not push me into the next bracket, and taking it in installments will not drop me into a lower bracket)
3. Use the lump sum $, after taxes, and borrow remaining from new 401k to pay off entirety of medical school loans.
4. Contribute 19k to new job’s 401k, while also contributing (approx) 20K per year to paying back the loan (this will not decrease my take home by any measureable amount, since I was already contributing 19K - although pre-tax - to my old job’s 457.)
5. Continue to contribute towards my Roth IRA and HSA (these will not be affected)

OR
1. Buy lottery tickets

I realise that I may (or likely will) get a higher rate of return if I left the 100K in 401K, but assuming a 7% return (vs the 4.5%) I would stand to “lose” approximately $16K over 5 years which to me seems worth the mental relief of getting this monkey off my back.

Thoughts?
Is this completely insane... or just mildly insane?

Thanks
The return in your investments is compound interest. Your loans are simple interest. Other than that you have to consider the possibility that you don't pay it back in time. You may consider refinancing your student loans and paying them off with that 20k a year you have extra to pay off a 401k loan and just let your investments grow. You can add in some shenanigans using zero percent credit cards with to free up money now for loans and paying the card off before the intro rate expires but that gets tricky and if you don't have a lot of bills you can put on the card then cash advance or balance transfer fees would eat into the benefit.
 
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FutureInternist

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The return in your investments is compound interest. Your loans are simple interest. Other than that you have to consider the possibility that you don't pay it back in time. You may consider refinancing your student loans and paying them off with that 20k a year you have extra to pay off a 401k loan and just let your investments grow. You can add in some shenanigans using zero percent credit cards with to free up money now for loans and paying the card off before the intro rate expires but that gets tricky and if you don't have a lot of bills you can put on the card then cash advance or balance transfer fees would eat into the benefit.

Did not realise that the interest on the loan is simple vs compound.... good to know.

I just figured a lump sum now would get the monkey off my back, but I see the potential benefit in just paying a bit extra each month.

Will check with Fidelity to see what they say.
 
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FutureInternist

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So just in case someone else is in same situation.
I had some $ in a 401A as well (which is employer matched funds) and there is an option to roll that over into an IRA and then do the back door Roth IRA.

You DO pay taxes (as expected), but this conversion doesn’t count towards your yearly limit of $6K (12k if married), so you could potentially gain years of contributions by doing this.

So new plan is to roll over from old employers 403b into new one’s 401k. (and NOT take a loan against it)
Take the 457 as lump sum and make a significant dent into the loans.
Do the 401A to Roth IRA conversion, and then increase my monthly payments for loans to previous payment plus what I would have contributed to Roth IRA.
 

FutureInternist

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Don't touch the 401k. Refinance and pay it off with income.

Yes, that is what I ended up on deciding.

The lump sum from 457 will make a significant dent and just grind out some extra shifts each month.
The 401A to Roth IRA conversion gives me a lump sum contribution that will equal approximately 10 years of contributions, so will use the $ I would have put towards Roth IRA, as extra payments towards loans.

Gotta take advantage of the 0% interest till Oct, as much as I can.

Thanks for the responses.
 

FutureInternist

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I'm always hesitant in touching retirement. I'm in the same boat as everyone else. You can always refinance your student loans again. Variable rates are incredibly low and I've seen some get rates as low as 1% or less.

True, but the “variable” part is scary.. The cap on some of them (from SoFi as an example) is approx 8%
 

ThoracicGuy

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Yes, that is what I ended up on deciding.

The lump sum from 457 will make a significant dent and just grind out some extra shifts each month.
The 401A to Roth IRA conversion gives me a lump sum contribution that will equal approximately 10 years of contributions, so will use the $ I would have put towards Roth IRA, as extra payments towards loans.

Gotta take advantage of the 0% interest till Oct, as much as I can.

Thanks for the responses.

If you are part of a governmental 457, that can be rolled into an IRA as well. If it is a nongovernmental one, it can only be rolled over to a nongovernmental 457.
 

FutureInternist

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If you are part of a governmental 457, that can be rolled into an IRA as well. If it is a nongovernmental one, it can only be rolled over to a nongovernmental 457.

True... mine is a non governmental 457, and my new job doesn’t have a 457 (since its for-profit), so (from my understanding), the only option I have is to take a distribution.

Whether its a lump sum or in installments was the only question and since my salary is right in the middle of a tax bracket, taking it as a lump sum wouldn’t put me in the next bracket, so how much I pay in taxes would be unchanged.
 
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The PA Investor

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True, but the “variable” part is scary.. The cap on some of them (from SoFi as an example) is approx 8%
True but Dr. Dahle provides a really good explanation that he explains clearly in why it may be beneficial to go for a variable rate loan with a fairly short loan.

 

Splenda88

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The return in your investments is compound interest. Your loans are simple interest. Other than that you have to consider the possibility that you don't pay it back in time. You may consider refinancing your student loans and paying them off with that 20k a year you have extra to pay off a 401k loan and just let your investments grow. You can add in some shenanigans using zero percent credit cards with to free up money now for loans and paying the card off before the intro rate expires but that gets tricky and if you don't have a lot of bills you can put on the card then cash advance or balance transfer fees would eat into the benefit.
Hmmm... Never thought of that.
 
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