Pay yourself interest when you buy a Lucid

[CapHillDC]

I know there has been a lot of very good discussion about financing options, rates from different institutions, etc.
I'm not sure if this has been discussed before, but I have been exploring taking out a loan against my 401(k) plan. The loan generally does not have to be for any particular purpose, so proceeds could be used to cover part of the cost of your Lucid. When you make payments on the loan back to your 401(k) plan, the payments include both principal and the set interest rate. So basically, you are borrowing from your own asset and paying that asset back to your asset with interest. There are MANY pros and cons to carefully consider, so here is a link to a great article.

In general, you can borrow up to $50k and it must be paid back to your plan within 5 years. I think the interest rate is set based on prime + 1 or 2 points. It probably is set by your plan administrator within certain parameters. For my company's plan, there is only a $100 fee to take out the loan. It can be paid back through a payroll deduction. Payments do not have to be paid monthly but must be paid every quarter.

https://www.businessinsider.com/personal-finance/401k-loan

I'm a CPA and not a lawyer, so I probably need to research all the disclaimers that I should have included at the end of this post!

 

[DeaneG]

I wouldn't want to liquidate equity positions in a 401(k) right now to generate cash for a car though - I 'm hoping the market will recover somewhat over the next five years.

 

[thecodingart]

I wouldn't want to liquidate equity positions in a 401(k) right now to generate cash for a car though - I 'm hoping the market will recover somewhat over the next five years.

If anything happened, this money is gone. If anything happens to a car loan, just the car is gone. Big difference when you’re cash is collateral versus a depreciating asset .

 

[SDHacker]

The company I worked for suspended contributions while the loan was outstanding so you lost out on being able to contribute to keep retirement savings going but also the tax consequences of not making those contributions.

 

[CapHillDC]

If anything happened, this money is gone. If anything happens to a car loan, just the car is gone. Big difference when you’re cash is collateral versus a depreciating asset .

Very true!

 

[CapHillDC]

The company I worked for suspended contributions while the loan was outstanding so you lost out on being able to contribute to keep retirement savings going but also the tax consequences of not making those contributions.

Double whammy...

 

[gmoney]

I wouldn't want to liquidate equity positions in a 401(k) right now to generate cash for a car though - I 'm hoping the market will recover somewhat over the next five years.

Dear car buyer….you need to ask your 401k company if they need to sell investments to put the loan in collateral account (pay yourself interest)…if they do then you have to happy with getting that return on your loan for 5 years…I would think that buying a depreciating asset with retirement money isn’t a good idea.

 

[goshen]

A lot of people have experienced losses of $100k and more this year alone in their 401k investment accounts due to global economic downturn. There is still no guarantee of any recovery soon. For such people, will that still be a bad idea to take some “self-repayable” loan out to enjoy their dream “depreciating” asset especially if they decide to keep the car for the long run? I think not because the idea of 401k is to invest for the future that no one has guarantees for. There is nothing wrong in enjoying a fraction of that future now while you can. After all, it will likely take close to 5 years or even more to recover all the 401k losses we’ve all experienced in our investment this year alone, unless of course one is a serial investor. Just my thoughts and I may be absolutely wrong and stand corrected.

 

[borski]

For such people, will that still be a bad idea to take some “self-repayable” loan out to enjoy their dream “depreciating” asset especially if they decide to keep the car for the long run?

Yes, because you would be selling investments at a low price, potentially being taxed on it (let’s ignore Roth for now), and not allowing it to recover and grow over time. The whole point of retirement saving is to not touch it until retirement, letting it grow, as in the long run (and on a long enough time scale) investments do recover and grow.

Anyone who is nearing the age of retirement shouldn’t be in aggressive assets anyway, like equities. They’d be in bonds and other fixed income vehicles; the target date funds of any 401k do exactly this. Slowly adjust your portfolio from “very aggressive” to “very safe” as you reach retirement age, for this very reason.

There is nothing wrong in enjoying a fraction of that future now while you can. After all, it will likely take close to 5 years or even more to recover all the 401k losses we’ve all experienced in our investment this year alone, unless of course one is a serial investor.

You’re doing so at the expense of your future, because you’re transferring investments in appreciating assets (over the long term) to buy a depreciating asset.

(This isn’t financial advice, blah blah, talk to a CFP etc)

 

[thecodingart]

Yes, because you would be selling investments at a low price, potentially being taxed on it (let’s ignore Roth for now), and not allowing it to recover and grow over time. The whole point of retirement saving is to not touch it until retirement, letting it grow, as in the long run (and on a long enough time scale) investments do recover and grow.

Anyone who is nearing the age of retirement shouldn’t be in aggressive assets anyway, like equities. They’d be in bonds and other fixed income vehicles; the target date funds of any 401k do exactly this. Slowly adjust your portfolio from “very aggressive” to “very safe” as you reach retirement age, for this very reason.


You’re doing so at the expense of your future, because you’re transferring investments in appreciating assets (over the long term) to buy a depreciating asset.

(This isn’t financial advice, blah blah, talk to a CFP etc)

The thought of taking out an equity loan on my home crossed my mind for my vehicle, until I realized that it was just a temptation to take advantage of a market that could bring me under water with my home. It was a dumb thought and I'm very happy I didn't do it.

@goshen
You'll basically get the same advice from any person who cares about their finances.

 

[goshen]

The thought of taking out an equity loan on my home crossed my mind for my vehicle, until I realized that it was just a temptation to take advantage of a market that could bring me under water with my home. It was a dumb thought and I'm very happy I didn't do it.

@goshen
You'll basically get the same advice from any person who cares about their finances.

Quite understood but everyone’s situation is not the same. If you take an equity loan on your home and get a better interest than an auto loan will provide you, wouldn’t that be a cheaper option? I guess the argument will be if you can’t repay, your home goes for it, compared with if your car if you took the auto loan. The key lesson is everyone should try and cut their coat according to their future size.

 

[goshen]

Yes, because you would be selling investments at a low price, potentially being taxed on it (let’s ignore Roth for now), and not allowing it to recover and grow over time. The whole point of retirement saving is to not touch it until retirement, letting it grow, as in the long run (and on a long enough time scale) investments do recover and grow.

Anyone who is nearing the age of retirement shouldn’t be in aggressive assets anyway, like equities. They’d be in bonds and other fixed income vehicles; the target date funds of any 401k do exactly this. Slowly adjust your portfolio from “very aggressive” to “very safe” as you reach retirement age, for this very reason.


You’re doing so at the expense of your future, because you’re transferring investments in appreciating assets (over the long term) to buy a depreciating asset.

(This isn’t financial advice, blah blah, talk to a CFP etc)

I agree with your submission. The only other thing I’d point out is investments are risks and you may or may not gain long term. Given the amount of losses this year alone in stocks decline, 50k out of a 401k is not that alarmingly outrageous for a dream depreciatable asset…as long as you have a path towards paying back on schedule. It will likely take almost the same amount of time for stocks to rebound to the glory days. Plus, you can continue to stock up outside of 401k if you desire to stay in the game.

IMPORTANT DISCLAIMER: Like you, I am not a CPA or tax attorney or financial adviser, so pls anyone reading this should speak with such professionals and not take any action based on this discussion.