Need help deciding to pay off 401K loan balance

T

tron9901

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I've been borrowing from my 401K, and paying the loan off in full as soon as possible. After the loan has been paid off, a few or several months later I will need a sum of money again, and I'll take out another loan, repeating the process. I've gone through several iterations of this, always trying to pay the loan off in full as soon as possible, in order to keep the money working for me in my 401K.

There are several variables involved so it's not always easy to decide exactly when to pay off an existing loan, and when I'll be subsequently taking out a new loan.


My question involves making the decision to pay off some or all of an outstanding loan, based on how much interest I would be "losing out on" if I didn't.


Here's my current situation:
- 401K balance: $185,000.00
- 401K outstanding loan balance: $19,000.00
- 401K type of fund allocation: S&P 500 Index Fund (100%)
- 401K current rate of return: 18.00%


My question is, how much 401K interest am I losing out on by not paying the loan off, and keeping an outstanding balance?


Or, more specifically, to simplify things - for every $1,000.00 that I don't pay back, how much 401K interest am I losing out on, per month?

Any help figuring this out would be greatly appreciated. Thanks!
 
This cannot be answered with the limited information you have supplied.

Are you really getting 18%? What could you possibly be doing with the money in your hands that will earn more than that?

Is there a loan rate on this loan? You're certainly losing the interest charged on the loan. (arrears or in advance?)

We are absolutely not tax advisors. You should consult one.
We are also not a consulting service. We're here to help math students with the homework, test prep, and general exploration of assigned subjects.
 
tkhunny said:
This cannot be answered with the limited information you have supplied.

Are you really getting 18%? What could you possibly be doing with the money in your hands that will earn more than that?

Is there a loan rate on this loan? You're certainly losing the interest charged on the loan. (arrears or in advance?)

We are absolutely not tax advisors. You should consult one.
We are also not a consulting service. We're here to help math students with the homework, test prep, and general exploration of assigned subjects.
Click to expand...

I'm not seeking any tax advice or investment advice whatsoever. I'm simply looking for answer strictly from a mathematical point of view. The bottom line is, I have to periodically take money out of an investment fund, and then pay it back. I thought a question like mine could be answered with a mathematical calculation, by looking at it in it's simplest terms:


- Investment fund balance: x
- Investment fund rate of return: y
- For every $1000.00 taken out of this investment fund, for each month, returns will be decreased by: z


If this is the wrong forum for my type of question, my apologies for any misunderstandings. Can you recommend a forum that can answers questions like mine which aren't necessarily homework based?
 
If it's a loan, it's not that easy.

You will also need to specify the precise way in which funds are credited interest while in the investment.

If you are talking about very short term borrowing, a Simple Interest approximation probably would do.

A = 1000 * (loan rate) * days / 365

B = 1000 * (investment rate) * days / 365 = Opportunity Cost

C = 1000 * (alternate investment for whatever you are doing with the cash) * days / 365

C - A - B = Cost to pull it off for some number of days.

If you are doing this for more than a year, I would suggest something more complicated.
 
tron9901 said:
… 401K balance: $185,000.00

outstanding loan balance: $19,000.00 …

401K current rate of return: 18.00% …


My question is, how much 401K interest am I losing out on by not paying the loan off, and keeping an outstanding balance?
Click to expand...
Assuming that 18% is simple interest (annual rate), you multiply the principal by 0.18, to calculate the interest.

(185000)(0.18) = 33300

Your $185,000 principal earns $33,300 interest per year.


185000 - 19000 = 166000

(166000)(0.18) = 29880

33300 - 29880 = 3420

You're losing $3,420 annual interest, for each year that your principal is reduced by $19,000.


… to simplify things -- for every $1,000.00 that I don't pay back, how much 401K interest am I losing out on per month? …
Click to expand...
(1000)(0.18) = 180

[Note that 19 times 180 is 3420.]

180/12 = 15

For each $1,000 that is not in your principal, you're losing $180 per year; that's $15.00 per month.


I don't know whether the loan is interest-free. If it is not, then you need to decide whether you consider the interest paid on the loan as a loss.

Disclaimer: Boldface type above indicates a BIG, simplifying assumption. :cool:
 
mmm4444bot said:
Assuming that 18% is simple interest (annual rate), you multiply the principal by 0.18, to calculate the interest.

(185000)(0.18) = 33300

Your $185,000 principal earns $33,300 interest per year.

185000 - 19000 = 166000

(166000)(0.18) = 29880

33300 - 29880 = 3420

You're losing $3,420 annual interest, for each year that your principal is reduced by $19,000.

(1000)(0.18) = 180

[Note that 19 times 180 is 3420.]

180/12 = 15

For each $1,000 that is not in your principal, you're losing $180 per year; that's $15.00 per month.

I don't know whether the loan is interest-free. If it is not, then you need to decide whether you consider the interest paid on the loan as a loss.

Disclaimer: Boldface type above indicates a BIG, simplifying assumption. :cool:
Click to expand...
Thanks for the info, you told me what I needed to know.
 
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