Borrowing from 401k to reduce RMD
Borrowing from 401k to reduce RMD
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 Because the RMD is calculated on December 31st, a loan could effectively decrease the amount withdrawn.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?
Setting aside for the moment whether the tax-deferred return is worth it, what do you think about this strategy?
Re: Borrowing from 401k to reduce RMD
Help me understand how you think a loan taken out against your 401K reduces the size of the account (and thus the RMD)?
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: Borrowing from 401k to reduce RMD
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.
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.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Borrowing from 401k to reduce RMD
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.
The surest way to know the future is when it becomes the past.
Re: Borrowing from 401k to reduce RMD
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.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Borrowing from 401k to reduce RMD
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.
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.
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Re: Borrowing from 401k to reduce RMD
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.
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.
Re: Borrowing from 401k to reduce RMD
Thanks for this explanation.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.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Borrowing from 401k to reduce RMD
delamer wrote: ↑Sun Jun 20, 2021 10:17 amThis makes sense. Seemed too good to be possible. Thanks!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.