Borrowing from 401k to reduce RMD

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wshang
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Borrowing from 401k to reduce RMD

Post by wshang »

Recent legislation allows borrowing from a 401k UP from $50k to $100k. It occurs to me that with interest rates so low and if we enter into a period of low returns in the stock market, borrowing from a solo 401k may be a method of decreasing the calculated RMD. Because the RMD is calculated on December 31st, a loan could effectively decrease the amount withdrawn.

Setting aside for the moment whether the tax-deferred return is worth it, what do you think about this strategy?
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David Jay
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Re: Borrowing from 401k to reduce RMD

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Help me understand how you think a loan taken out against your 401K reduces the size of the account (and thus the RMD)?
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wshang
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Re: Borrowing from 401k to reduce RMD

Post by wshang »

David Jay wrote: Sat Jun 19, 2021 9:37 pm Help me understand how you think a loan taken out against your 401K reduces the size of the account (and thus the RMD)?
If the loan is taken in December and returned in January, wouldn't the end of the year amount used to calculate the RMD be decreased?
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David Jay
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Re: Borrowing from 401k to reduce RMD

Post by David Jay »

Do you think a 401K loan takes money out of your 401K account? It doesn’t.

You may be confusing this for the COVID distribution from 2020 with 3 years to pay it back. That was an actual distribution where money is taken out of the 401K account.
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cheese_breath
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Re: Borrowing from 401k to reduce RMD

Post by cheese_breath »

David Jay wrote: Sat Jun 19, 2021 10:25 pm Do you think a 401K loan takes money out of your 401K account? It doesn’t.

You may be confusing this for the COVID distribution from 2020 with 3 years to pay it back. That was an actual distribution where money is taken out of the 401K account.
The value of your 401K is based on the value of what it's invested in. Stocks, bonds, real estate, or whatever. Consider bonds; if you invest in a bond you're loaning money to the bond holder, but the value of your account doesn't suddenly decline because you bought a bond. Similarly, the account value shouldn't decline because you loan money to yourself.
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delamer
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Re: Borrowing from 401k to reduce RMD

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David Jay wrote: Sat Jun 19, 2021 10:25 pm Do you think a 401K loan takes money out of your 401K account? It doesn’t.

You may be confusing this for the COVID distribution from 2020 with 3 years to pay it back. That was an actual distribution where money is taken out of the 401K account.
I feel like I’m missing something that should be obvious.

When we took a $50,000 loan from my husband’s 401(k), the balance of the account went down.

So if the balance was $500,000 pre-loan, it was $450,000 immediately post-loan. And if we had liquidated the account immediately post-loan, we would have received only $450,000.
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docco
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Re: Borrowing from 401k to reduce RMD

Post by docco »

Wasn’t the $100k 401k loan limit part of the CARES Act and expired in September 2020 to revert to $50k max?

In any case, I think that mechanically what you are thinking of will have the effect of reducing RMD for that year. But assuming you are in your mid-70s, if the max 401k loan is $100k, you’re looking at an RMD reduction of $5000. And if the max 401k loan is $50k, the reduction would be less than $3000. So, I don’t think it’s going to do much to reduce the RMD amount.
Lionel Hutz
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Re: Borrowing from 401k to reduce RMD

Post by Lionel Hutz »

A 401k loan does reduce the amount of money currently invested. I take a 50,000 loan, that money is sold from my funds and in my hands

A 401k loan does not, however, reduce the overall account balance, and therefore does not reduce RMD.

Reason: the loan amount remains a line item on the books. A 500,000 401k balance in which a 50,000 loan is taken will reflect a total balance still of 500,000, with 450,000 invested currently and 50,000 outstanding in the loan.

The loan remains a line item because there’s the assumption it will be repaid, and also has not been taxed yet.
delamer
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Re: Borrowing from 401k to reduce RMD

Post by delamer »

Lionel Hutz wrote: Sun Jun 20, 2021 8:59 am A 401k loan does reduce the amount of money currently invested. I take a 50,000 loan, that money is sold from my funds and in my hands

A 401k loan does not, however, reduce the overall account balance, and therefore does not reduce RMD.

Reason: the loan amount remains a line item on the books. A 500,000 401k balance in which a 50,000 loan is taken will reflect a total balance still of 500,000, with 450,000 invested currently and 50,000 outstanding in the loan.

The loan remains a line item because there’s the assumption it will be repaid, and also has not been taxed yet.
Thanks for this explanation.
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wshang
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Re: Borrowing from 401k to reduce RMD

Post by wshang »

delamer wrote: Sun Jun 20, 2021 10:17 am
Lionel Hutz wrote: Sun Jun 20, 2021 8:59 am The loan remains a line item because there’s the assumption it will be repaid, and also has not been taxed yet.
This makes sense. Seemed too good to be possible. Thanks!
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