Conference 7.286::digital_investing

    
    I'm considering taking a 401k loan for a new car purchase.
    With the intention that the intrest paid is paid back to myself.
    My wife would prefer to take an equity loan against the house,
    since that intrest is tax deductable and we did have to make a
    suplemental payment to the IRS for 1996 tax year. 
    Can anyone shed light on what would be the better way.
    
    BTW the 401k does not have enough funds for the full loan which
    I would need, so If we went the 401 loan path we'd still have to
    get additional funding from somewhere else. 
    
    thanks in advance
    steve

The conventional wisdom is that it is a bad idea to borrow against your 401(k)
plan because you will lose the opportunity to make high returns on your stock
portfolio. Especially if you're young, this could translate to a significantly
smaller retirement portfolio years from now when you retire. Even if you keep
your 401(k) in the fixed income investment (asset allocation in retirement
portfolios is another issue), I think you'll still end up with less at
retirement if you make the loan.

As to the home equity loan, I've heard many say it's not a good idea to risk
your house for a loan on a car. However, if you believe that there is little or
no danger of that, I don't personally see what's wrong with that.

This is merely my opinion and I'm sure more informed opinion will follow from
other noters.

    You can also view the loan as an investment with a fixed rate of
    return.  Plus you are not paying the interest to a bank on a
    conventional loan, nor are you putting your house at risk by borrowing
    against it's equity.  Another interesting note:  A 401K loan is not
    used by banks when qualifying you for a loan, or for credit.
    
    On the downside, if you plan on leaving your job, you need to come up
    with the loan within 30 days of your departure, or pay the IRS tax and
    penalties.
    
    

Yes, a 401K loan is indeed (or can be) considered as an outstanding obligation
when seeking additional credit.  When I refinanced my mortgage in 1993, the
lender wanted additional documentation on my outstanding 401K loan (which was
due to be paid off in a month or two.)


				Steve

Hi

 I thought federal tax rules only allow home equity to be deductible
if it is used to improve the home.

Nope.

>   On the downside, if you plan on leaving your job, you need to come up
>    with the loan within 30 days of your departure, or pay the IRS tax and
 
I haven't read the Digital plan docs, but this was not true when I left a
previous employer.  I continued to send in bi-weekly checks for about 18 months
until the loan was paid off.

As for the original question, I would lean towards the home equity because I
hope my 401K can yield a better return than the fixed rate of interest,
especially if you factor in a tax advantage from the home equity loan.

    With classic auto loans at circa 6-7% (and fixed, at that), is
    the meager tax deductability of the interest worth the application
    fees, etc, in taking an extra (and typically variable; pray for
    rates not to rise) note out on the house?
    K 

The current SAVE rules say you have to repay all loans within 90 days of
leaving Digital.

http://forevr.shr.dec.com/Benefits/BenefitsBook/bb-chapter7.htm#Repaying

Home equity interest is deductible on up to $100,000 of debt.
Home acquisition interest is deductible on up to $1 million of debt.

See Publication 936 for more info.

Sam

A loan against your 401K means that the Principal is STILL earning interest.
The rate at which it earns is your loan rate.  And it is as safe a rate of
return as is your ability to pay it; unlike that vagaries of Mutual Funds.
And a 401K loan is a way to put more of your money (the interest) in the 401K 
than the gvt permits based on salary deductions.

When applying for a home mortgage, a 401K loan is noted, but with special
considerations; it is a 100% secured loan.

A home equity loan is going to involve some level of expenses, as in closing
costs.   

A bank/Credt Union loan is straight forward without any incumberances on other
assets.

Back when (far, back) we could still deduct interest costs on Schedule A, I 
used the 401K loan play; kind of a double whammy against the IRS :-).

More recently, I have always found more or less the same out of pocket costs
for bank/cu loans as compared with 401K loans.  I also have come across new
car dealers who have sweetheart deals with banks; book the bank loan thru
the dealer and a)DEALER gets a kickback, b)YOU get a lower_than_street rate.

I have never found a home equity rate low enough to cover the additional 
paperwork costs of re-running my mortgage.  Besides, I use my home to live in,
not to invest with.

So, the basic advice still is the best advice.  Run the numbers and see what 
the total cost of each option is and go with the lowest.


Since you asked...

Luck.
Dave