Should you borrow from a 401(k) or 403(b)?
Should you borrow from a 401(k) or 403(b)? Definitions
- Current 401(k) or 403(b) balance
- The starting balance or current amount you have invested or saved in your 401(k) or 403(b).
- Annual rate of return
- The annual rate of return for your 401(k) or 403(b) account. This calculator assumes that your return is compounded annually and your loan repayments are made monthly. The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor's 500® (S&P 500®) for the 10 years ending December 31st 2019, had an annual compounded rate of return of 13.2%, including reinvestment of dividends. From January 1, 1970 to December 31st 2019, the average annual compounded rate of return for the S&P 500®, including reinvestment of dividends, was approximately 10.7% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a financial institution may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.
It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that investment funds and/or investment companies may charge.
- Loan amount
- The amount you are planning to take out as a loan from your 401(k) or 403(b) account. Loans are normally limited to the lessor of 50% of your balance or $50,000. Contact your plan administrator regarding the actual limits on your specific account.
- Loan interest rate
- The annual interest rate paid on this loan. We assume that the monthly rate is one twelveth the rate entered. All payments are made monthly. Since loan balances have interest that is normally compounded monthly, and investment rates of return are stated annually (and compounded annually), more interest will be paid on a loan with the same stated interest rate as the expected rate of return on your 401(k) or 403(b) balance.
- Loan term
- Number of years to repay your 401(k) or 403(b) loan. Depending on your plan, there may be limits on your repayment term. Typically, if you leave your employer before your loan is repaid, you may be required to repay the entire outstanding balance immediately. If you are unable to repay the loan balance, the balance may be considered an early distribution and subject to income taxes and early withdrawal penalties.
- Income tax rate
- The marginal income tax rate you expect to pay. You may also wish to increase your marginal tax rate to also account for any state income tax. **TAXTABLE_CURRENT_DEFINITION**
- Interest rate of other debt
- If you are using this loan to pay off other outstanding debt, enter the interest rate for that debt here. Otherwise, enter the interest rate of the loan you would need from a traditional lender for the intended use of your borrowed funds. For example, if you were purchasing a car or other vehicle, enter the interest rate you could receive from your dealership or financing company for the loan that your 401k would replace.