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Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

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  #31  
Old 06-09-2006, 01:05 PM
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Quote:
Originally Posted by MathGeek92
I have always thought of a policy loan (whether it's a 401k, 403b or whatever) as a guaranteed return (since I am of course completely credit worthy). If I were trying to maximize my return for a given volatility tolerance level, Policy loans work the best. You generally pay yourself at a rate above the risk free, so in essence, isn't it like achieving above CAPM results generating positive alpha?
I don't get this. Don't I have to pay myself back with my own money? If I don't take the loan, I get the market return plus I have my cash in hand to invest as I see fit. What am I missing in my reasoning?
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  #32  
Old 06-09-2006, 01:11 PM
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Originally Posted by SEA
Uhhh...two questions:

1. What reasons?
2. Who's Emily?
http://www.actuary.ca/actuarial_disc...ad.php?t=81822

Sorry it was in this tread about a month ago over in pensions.
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  #33  
Old 06-09-2006, 01:19 PM
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If 4k makes that much of a difference you're not ready to buy. IMHO. Also, probably not a great idea to buy a condo while you're changing jobs. **** happens, stick to 1 life change at once if you can (spoken by someone who just had 3 happen at once). Get settled into the new job and then think about buying. I don't know what city you're in, but I doubt the condos are appreciating as much as single family homes.
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  #34  
Old 06-09-2006, 01:20 PM
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Originally Posted by yankeetripper
I still don't like 401(k) loans for a number of reasons but Emily was right the double taxation of the loan interest is smoke and mirors.
It's not smoke and mirrors. Work one spreadsheet where the interest repaid to yourself with post-tax money becomes your cost basis, and another where it doesn't. You'll get taxed more in the latter scenario.

I'm not saying the interest being taxed twice makes the 401(k) loan a bad idea. But it will be taxed twice.
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  #35  
Old 06-09-2006, 01:24 PM
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If I take a loan today and buy an ETF, doesn't my CAPM return go up since I've leveraged my position in the market? Yes I realize I'm paying off the loan with my own money, but it was money I was planning on putting in the market anyway.

I'm not an investment guru by any means...but I've thought of this as my own way of leveraging my returns and I get all the returns versus using a brokerage account where I borrow at 10%+ (payable to the broker) and buy stocks. (10%+ was the rate that I saw on Scottrade or somewhere). If I can borrow against myself and pay all the interest to myself, it seems like that is a winner all the way around?

Or If I was planning on borrowing from a bank to buy a new "thing" It would seem that by borrowing against my 401k (assuming I can keep deferring the same part of salary) allows me to reduce my volatility of my 401K and also allows me to dollar cost average back into the market.
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  #36  
Old 06-09-2006, 01:26 PM
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Best post from that thread (present company excluded), and the reason I do like 401(k) loans:

http://www.actuary.ca/actuarial_disc...9&postcount=32

[Edited because I accused the wrong person of making the smoke and mirrors argument]

Last edited by SEA; 06-09-2006 at 01:29 PM..
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  #37  
Old 06-09-2006, 01:28 PM
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Originally Posted by Incredible Hulctuary
It's not smoke and mirrors. Work one spreadsheet where the interest repaid to yourself with post-tax money becomes your cost basis, and another where it doesn't. You'll get taxed more in the latter scenario.

I'm not saying the interest being taxed twice makes the 401(k) loan a bad idea. But it will be taxed twice.
The problem with that logic is that it ignores the fact that the earnings on the money would have made if you had not borrowed it wouldn't have given you a basis either.
If you are taking the loan anyway (401k or outside 401k) it really doesn't matter if it is inside the plan or a 3rd part. You'd just have to compare terms to see if made sense and determine if 1 - you're going to be with the company long enough to pay it back to aviod an unforseen taxable event and 2 - if the lost opportunity cost is worth it to you, that is if your invetsments in the plan will earn a higher rate than the loan interest or not.
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  #38  
Old 06-09-2006, 01:34 PM
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Originally Posted by SEA
If you agree it is smoke and mirrors then why are you making it here?
I'm not hulk is. I used to be in the double tax camp, I'm not anymore. The main reasons I don't like them -

They are usually payable immediately if you terminate or the company terminates the plan - at the time you have no employement you may suddenly be asked to repay the loan or take it as taxable income with associated penalties. This is a doulble whammy IMO in that you get hit with an unexpeted tax bill, will probably be underwithheld when you file your taxes and you've permantly take that out of your retirement savings.

The other more personal reason is they are the number 1 thing gets f-d up in DC plan administration.
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  #39  
Old 06-09-2006, 01:40 PM
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Originally Posted by yankeetripper
The problem with that logic is that it ignores the fact that the earnings on the money would have made if you had not borrowed it wouldn't have given you a basis either.
If you are taking the loan anyway (401k or outside 401k) it really doesn't matter if it is inside the plan or a 3rd part. You'd just have to compare terms to see if made sense and determine if 1 - you're going to be with the company long enough to pay it back to aviod an unforseen taxable event and 2 - if the lost opportunity cost is worth it to you, that is if your invetsments in the plan will earn a higher rate than the loan interest or not.
You are talking about whether 401(k) loan is a good idea or a better idea than other sources. I am not. My only point is the double taxation.

Pay $1000 in interest (using post-tax money), it grows to $5000, you pay tax on the whole $5000 and not just the $4000 gain. That's double taxation. Whether it is better or worse than any other kind of loan is a different and more complex question for which the answer varies based on numerous factors (of which the double taxation is just one).
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  #40  
Old 06-09-2006, 01:45 PM
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But the point is that that $5000 would have presumably grown to $5000+x ... and you would have been taxed on all $5000+x when it was taken out.

The ONLY difference in a loan is that you are locking in a guaranteed rate instead of a rate based on the market performance in your funds. There are no real tax implications at all, IMO.
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