401k loans / payoff or leverage?

[BigRedRage]

So, when I bought my house in January, I took out a 50k 401k loan to help with the transition. In February, my old house sold and I have all the money I need to pay the 401k loan off. I have gone into ADP to do this, and wildly enough, it takes 3 clicks to get the loan but to pay it off, there are multiple steps.

In short, they want me to print and complete forms, fill them out, go to the bank and get a cashiers check and then mail the check to the office across the country to pay the loan off. I loathe taking time off of work for things so I have still yet to actually go do this and the money is just sitting in my savings.

My question:

What is the difference in me paying it back as I am vs a lump sum? Did my stocks sell for the loan and are bought back as I pay it back? I know the interest is said to be "paid to yourself" but I am sure there is a negative of that but maybe thats only during a bull market?

I do not feel any pain from the loan payments coming out of my paycheck. So, before I jump through all of their hoops, I was reviewing if it makes more sense for me to pay the loan off or to just hold savings/leverage money and be prepared for other things coming up.

IE: Cybertruck drops in summer 2023 and I could put $50,000 down there instead of back into 401k to lower the amount of loan that will probably be at a 3-4% interest rate
IE: Invest it on my own when it comes time for markets to move forward between ETFs and buying down other stocks.
IE: just pay the loan back when I feel like we are near the bottom (if when you put money back, the 401k just buys the stocks back?)

Thanks for any insight

 

[Folster]

My initial thoughts are you sold near an all time high when you took out your loan. The S&P 500 is now down 20%. How fortunate because market timing rarely works. I would drop that money back in the market at a 20% discount. Sure it could go lower and it may not be as satisfying as a cyber truck in your driveway, but 65 year old BRR will thank you.

We've talked about the studies of lump sum vs. DCA investing and it's clear that lump sum comes out ahead more often than not due to the long term trend of the market. I would think the chances are even higher with the market being down 20% vs being at an all time high.

You wouldn't have taken out a 401K loan to buy a Cyber Truck, but that's essentially what you'd be doing if you used that money to buy one.

Finally, I can run some basic compounding models to compare lump sum vs paying back the loan, but I would need to know the term of the loan.

 

[Devilmaycare]

+1 to what @Folster said. He pretty much echos what I was thinking when reading your post. I'm in a sort of similar situation since I rolled over my 401k in February. I've been sitting on the $51k that was in that account since my plan is to put it into Vanguard's S&P index fund. I'm about to dump it back in as a lump sum since SPY is down about 700 down from when I started the rollover. It was fortunate timing for both of us.

 

[Folster]

+1 to what @Folster said. He pretty much echos what I was thinking when reading your post. I'm in a sort of similar situation since I rolled over my 401k in February. I've been sitting on the $51k that was in that account since my plan is to put it into Vanguard's S&P index fund. I'm about to dump it back in as a lump sum since SPY is down about 700 down from when I started the rollover. It was fortunate timing for both of us.

Yeah. If not lump sum, divide it by 6 at most and drop it in every month without fail..

 

[BigRedRage]

My initial thoughts are you sold near an all time high when you took out your loan. The S&P 500 is now down 20%. How fortunate because market timing rarely works. I would drop that money back in the market at a 20% discount. Sure it could go lower and it may not be as satisfying as a cyber truck in your driveway, but 65 year old BRR will thank you.

We've talked about the studies of lump sum vs. DCA investing and it's clear that lump sum comes out ahead more often than not due to the long term trend of the market. I would think the chances are even higher with the market being down 20% vs being at an all time high.

You wouldn't have taken out a 401K loan to buy a Cyber Truck, but that's essentially what you'd be doing if you used that money to buy one.

Finally, I can run some basic compounding models to compare lump sum vs paying back the loan, but I would need to know the term of the loan.

Yeah, the truck happens regardless and it only would have served moreso as a supplement to down payment in that example. However, it does sound like I am buying back stocks at the discount so it makes sense. I really just didn't want to go to the bank lol

I think the loan might even have been taken in December.

 

[BigRedRage]

Yeah. If not lump sum, divide it by 6 at most and drop it in every month without fail..

My loan is either monthly garnishment or a snail mail 1984 payoff method lump sum. So fkn annoying. 3 clicks to get the money. I'd have paid it months ago if not for the process.

 

[Russ Smith]

the only argument against doing what others are saying is if you think there's any chance you get laid off. Assuming the 401K loan is a work 401K, if you lost your job it becomes due essentially right away, I think you get 60 days.

But if that's not really a concern I 100% agree with the others.

 

[Ouchie-Z-Clown]

the only argument against doing what others are saying is if you think there's any chance you get laid off. Assuming the 401K loan is a work 401K, if you lost your job it becomes due essentially right away, I think you get 60 days.

But if that's not really a concern I 100% agree with the others.

Not necessarily. That is typically the case, but it’s only legally required if your employers plan explicitly requires it (which most do). Many employers have been amending their plans of late to allow for continued payment post-termination. But if you are delinquent and don’t cure in the allotted IRS timeframe it defaults and becomes a deemed distribution and is immediately taxable.

Some employers also allow for rollovers of loans. This is pretty rare too, but shouldn’t be.