Comments on: Should You Borrow Money to Fund a Retirement Account?

By: Randy

Randy — Wed, 02 Feb 2011 21:55:46 +0000

One way to look at such questions is to flip them over. Would you use money for your retirement account to pay off part of a home loan early? Probably not.

Would you use money otherwise going into a 401(k) and use it to pay off a second (line of credit) on a house? Maybe but probably not.

Would you borrow against a house at about 5% (with a tax deduction for interest payments) to make up for income plowed into a 401(k), which also earns a tax break? Probably not.

If you re-fi at a lower rate, would you use the savings to pay down the principle on the home loan or fund retirement? Probably fund retirement.

Why? These are all the same basic proposition — tradeoff in increasing home equity vs. funding retirement savings. But somehow seems riskier when actively taking out a new home loan to fund a retirement account. But the difference seems mostly psychological. (Granted, when you pay down a fixed loan, you don’t see a monthly savings, you just pay off earlier — but that translates to investing at 5% outside a retirement account).

By: Monevator

Monevator — Sun, 28 Feb 2010 14:01:22 +0000

I think this is a great article that goes beyond the knee-jerk “bad idea” which would certainly be my first response.

(I’m still minded to think it’s a risky idea, but you do a great job at presenting the other side here Ryan, IMHO).

By: Ryan

Ryan — Sat, 23 Jan 2010 16:36:15 +0000

In this case, I can see why he did it – the tax difference was fairly substantial (no income tax on $24k) which is beneficial if he didn’t have the cash to pay that in a month or two. He also added a huge amount of money to his retirement account, which gives more time for compound interest to work. It also depends on his earnings expectations for the coming months/years. I’m not certain I would have done it for myself, but I can understand why someone would choose to do it.

In the end, it looks like it worked out fairly well for everyone involved.

By: Kyle

Kyle — Sat, 23 Jan 2010 16:31:18 +0000

I don’t think borrowing money to invest is a good idea at all, especially for a retirement account. If somethng had happened and he had to repay that loan out of his retirement account he would have to pay a penalty on the withdrawl plus the interest on the loan. Your best bet is to fund what you can each year and accept the fact you may not be able to hit the maximum contribution.

By: Niki Arinze

Niki Arinze — Sat, 23 Jan 2010 13:27:20 +0000

I don’t funding a retirement account with borrowed money is a good idea. Sophisticated banks can’t even do that. Borrow short-term and lending long-term. With the idea that short-term rates will always be low is not a good bet. My personal opinion is that you should fund your account with actual “cash” not “credit”. Because if at some point your servicing debt payments go up unexpected or the debt is call in your screwed. Managing risk is crucial, and taking that risk is just unnecessary. The way to fund your account is by starting your own business or even learn to how trade/invest wisely in financial markets in order to provide an income stream. Not borrow to fund retirement. Just the opinions of a passionate entrepreneur and financial speculator.

By: Craig

Craig — Fri, 22 Jan 2010 17:12:48 +0000

My apologizes, I read it wrong and thought it said “from.” Like you mention the cons are there are risks and no guarantees when borrowing and you could get yourself into a hole. If you are borrowing from family and you don’t have those risks, then it may be a better option.

By: Ryan

Ryan — Fri, 22 Jan 2010 17:07:53 +0000

Not to mention that he paid it off a year early, which lessened the amount of interest he paid.

By: Evan

Evan — Fri, 22 Jan 2010 16:58:47 +0000

If he is fully funding the SEP (46K) that means he makes north of $200K (because it is 46K or 25% whichever is greater) – this move would have given him that much more deductibility on top of any compounding retirement gains. For what? $4320 in interest costs? He probably got a bigger deduction for depositing it….