I have a loan with a 6.5% interest rate. Should I divert money into my 401(k) instead of prepaying?
The long term growth is not 6.5%, it's 10% give or take. But, that return comes with risk. A standard deviation of 14%.  Does the 401(k) have a match? And are you getting the full match? If no match, or you already top it off, the 6.5% is a rate that I'd be happy to get on my money. So, I would pay it off faster.  My highest rate debt is my 3.5% mortgage, which is 2.5% after tax. At 2.5%, I prefer to be a borrower, as that gap 2.5%-10% is pretty appealing, long term. Having a loan also represents risk.  IMHO you should retire the loan as soon as feasible in most cases.   JoeTaxpayer, as usual, raises a good point.  With numbers as he is quoting, it is tolerable to have a loan around on a asset such as a home.  While he did not mention it, I am sure that his rate is fixed. If the interest rate is variable:  pay it off. If it is a student loan:  pay it off. If you can have it retired quickly:  pay it off and get the bank off your payroll. If it is consumer debt:  pay it off.
"As Mhoran answered, typical match, but some have no match at all, so not bad.  The loan provision means you can borrow up to $50k or 50% of your balance, whichever is less. 5 year payback for any loan, but a 10 year payback for a home purchase.  I am on the side of ""don't do it"" but finance is personal, and in some situations it does make sense. The elephant in this room is the expenses within the 401(k). Simply put, a high enough expense will wipe out any benefit from tax deferral. If you are in this situation, I recommend depositing to the match, but not a cent more.  Last, do they offer a Roth 401(k) option? There's a high probability you will never be in as low a tax bracket as the next few years, now's the time to focus on the Roth deposits, if not in the 401(k), then in an IRA." The key thing to consider in a question like this is, What return am I getting on my investment versus what interest am I paying on the loan? If the investment returns more than what you're paying on the loan, than it makes sense to keep the investment and pay off the loan with other income. If the investment returns less, than it makes sense to cash it out to pay off the loan. One complicating factor is taxes. In the case of an IRA, you're not paying taxes on the profits. You do pay a tax penalty for an early withdrawal. Those are both factors that tend to make keeping the money in the IRA more desirable. And of course, if the choice is between keeping your investment and defaulting on the loan, you probably want to close out the investment. I don't know what return you're getting on your IRA, but it's probably more than 6.8%. I'd have to check but I think my retirement funds got over 20% last year. If you're not getting 6.8%, you might want to investigate switching to another investment fund. I'm sure there's a lot I don't know about your situation, but I'd think that keeping the IRA would be a better plan. If you can't add to it for some time well you get these debts paid off, well, that's how it is. I'll be happy to edit when you provide answers to the question I posed in the comments.  Given the choice (and I assume there is no other) I'd take a loan from the 401(k) vs a withdrawal.  You withdraw $40K. I'll assume 25% bracket as you're planning at least a $200K house. Hopefully, your taxable income is above $38K, the 25% line for singles. The tax and penalty is 35% total, federal. You net $26K. And you have $40K less in the retirement account. In 40 years, at 10% average growth, that's $1.8M you won't have in your 401(k). And as littleadv stated, no deposits for 6 months, meaning no matching. There's a few more thousand you'll lose.  You borrow $20K. Your 401(k) will see a return on the $20k that's better than the short bond account, 4-5% vs less than 1%. You are short $6K, but in return have paid no tax, no penalty, etc. I respect those who are strongly anti-loan, but even they would agree, this is the far lesser of 2 evils.   The above is pretty generic, there are better choices. But your CPA friend's advice is nearly as bad as it gets. By the way, the tax you'll save once you have the mortgage has nothing to do with that 10% penalty. Say you bought the house with cash (as many would be happy to do). You'd pay the penalty for the 401(k) withdrawal, but have no mortgage deduction. If you had the 20%, you still have a loan and the deduction, but no penalty for taking his bad advice.  My advice is to take that refund and use it to pay the loan faster. "If the difference in performance is worth it, consider ""borrowing"" from your 401k to put into the Roth.  You pay it back, but you can stretch it out over time, and the interest charged is actually yours, because you borrowed from yourself. But you can only borrow half of the account and you have to pay it back before you can do another loan." Your current loan is for a new car. Your refinanced loan would probably be for a used car. They have different underwriting standards and used car loan rates are usually higher because of the higher risks associated with the loans. (People with better credit will tend to buy new cars.) This doesn't mean that you can't come out ahead after refinancing but you'll probably have to do a bit of searching. I think you should take a step back though. 5% isn't that much money and five years is a long time. Nobody can predict the future but my experience tells me that the **** is going to hit the fan at least once over any five year period, and it's going to be a really big dump at least once over any ten year period. Do you have savings to cover it or would you have to take a credit card advance at a much higher interest rate? Are you even sure that's an option - a lot of people who planned to use their credit card advances as emergency savings found their credit limits slashed before they could act. I understand the desire to reduce what you pay in interest but BTDT and now I don't hesitate to give savings priority when I have some excess cash. There's no one size fits all answer but should have at least one or two months of income saved up before you start considering anything like loan prepayments. You need to talk to the 401(k) administrator, or HR, for the exact details. Typically, you can only borrow 50% of your balance, and can pay it back up to a ten year term. Some plans have different rules, this is just a common offering.  The larger issue is whether the loan prevents you from making further deposits till repaid. This would cost you not just the growth in the account, but the matched deposits for those years. That would be a deal killer for me. If that were the case, I'd drop my deposits to only get the match, and save for a real deposit without the loan. 817/150,000 = .54% Fees are based on balances not deposits, usually. Putting a front loaded fund as an option in a 401(k) should be criminal, not sure it is though.  Ask your HR dept to provide you fee details. If the .54% is correct, it's not bad.  I hope you have money from prior jobs as well, by the way. (Note: The OP does not state whether the employer-sponsored retirement savings are pre-tax or post-tax (such as a Roth 401(k)). The following answer assumes the more common case of a pre-tax plan.) This is a bad idea, IMHO. IRS Pub 970 lists exceptions to the 10% early withdrawal penalty for educational expenses. This doesn't include, as far as I can tell, student loan payments. So withdrawing from your retirement account would incur both income tax and penalties. Even if there were an exception, you'd still have to pay income taxes, which, depending on the amount and your income, could be at a higher marginal rate than you are currently paying.  If you really want the debt gone as soon as possible, why not reduce the amount you contribute to the retirement plan (but not below the amount that gets you the maximum employer match) and use that money to increase your monthly payments to the student loan? Note that, if you do this, you will pay taxes on income that would have been tax-deferred in order to save money on interest, so there's still a trade-off. (One more thing: rather than rolling over to your new company's plan, you could roll over to a self-directed Traditional IRA.) Do you have other things you might want to spend that cash on in the near future? (Like a down-payment on a house?) Beyond having emergency cash, the only reason to keep a pile of cash around is because you might need it for another purchase. Unless you are going to have other expenses that will require higher-interest loans to cover them, there's no need to sit on a big pile of cash. As long as you are getting the full match on your 401(k), that's the free money that might be worth more than the interest you are paying on the loans. In any case, I suggest you aim for at least 10% into your 401(k) account moving forward in your life so that you can properly fund retirement. 15% would be even better. It doesn't sound like you would be losing anything by paying the student loans, and you could then use the money freed from your loan payments to pay down your car faster. "Generally if you need to tap into your retirement for the house - you probably shouldn't buy the house. But that's your call. There are several things you could do. Sue your CPA ""friend"" for malpractice. Especially if there's any actual proof of that stupid suggestion. Check with your 401k administrator about home-purchase loan from the 401k. You'll be borrowing your own money, and repaying yourself back with interest, but it will be tax free and with no penalties. Keep in mind: if you cannot repay the loan, or you leave your employer without repaying it in full - the remaining balance will be considered withdrawal and you'll pay income taxes + 10% penalty on it. If you have an IRA, you can withdraw up to 10K without penalty if this is your first house (i.e.: you didn't own a house in the last 3 years), and is going to be your primary residence. You'll still pay taxes on the 10K. But, this is not available for 401k plans. You can request equal payments distribution calculated based on your life expectancy (This is the infamous 72(t)(2) distribution, even though many of the exceptions are in the IRC 72(t)(2). This in particular is 72(t)(2)(A)(iv)). Here's the full list of exceptions. Note that even if you're willing to pay the 10% penalty, many 401k plans do not allow distributions as long as you're still employed with the sponsoring employer. If you take a hardship distribution from your 401k (if it even allows it), you'll be prohibited from contributing for 6 months, and your employer will be prohibited from contributing on your behalf as well. I.e.: not only you take out your savings, you'll be barred from saving back. Also, in the same FAQ, it tells you that the hardship distribution can only include the amounts up to the original contributions (less whatever distributions already made), and not earnings or match. I.e.: it may actually be much less than the 40K you're counting on." I see you've marked an answer as accepted but I MUST tell you that STOPPING your 401k contribution all together is a bad idea. Your company match is 100% rate of return(or 50% depending on structure).  I don't care what market you look at, or how bad a loan you take out, you will not receive 100% rate of return, or be charged 100% interest. Further, taking out a loan against your 401k effectively does two things: It is a loan that must be repaid according to the terms of your 401k  AND in every 401k I've ever encountered, you cannot make contributions to the 401k until the loan is repaid. This in effect stops your contributions, and will almost certainly save you very little on your interest rates on your current loans. I have 4 potential solutions that may help achieve your goal without sacrificing your 401k match and transferring the debt from one lender to another, but they are conditional. Is your company match 100% up to 4% of your salary, or 50% of your contribution (up to a limit you have not yet reached)? This is important.  If it is 100% up to 4%, stop committing the additional 4% and use that to pay down your debt...and after ward set up that 4% as auto pay into an IRA, not into the 401k.  An IRA will make you more money because YOU have control over its management, not your employer. If it is 50% match, contribute until the match is met because you cannot get 50% rate of return anywhere, then take your additional monies and get an IRA.  As far as your debt, in this scenario simply suck it up and pay it as is.  You will lose far more than you gain by stopping your contributions. If you simply must reduce your expenses by 150$ month try refinancing the mortgage and rolling the 6500$ into it.  If you get a big enough drop in the interest rate you could still end up paying less. OR If you cannot make the gain there, try snowballing the three payments.  You do this by calling your student loan vendor and telling them you need to make much smaller payments, like even zero depending on the type of loan.  Then take ALL of the money you are currently spending on the 3 loans and put into the car payment.  When it's gone, roll the whole thing into the higher interest student loan, then finally roll it all into the last student loan.  You'll pay it off faster, and student loans have lots of laws and regulations regarding working with payers to keep them paying something without breaking them. WHATEVER YOU DO, DO NOT STOP YOUR CONTRIBUTIONS.  50% OR 100%, THAT MONEY IS GUARANTEED AT A HIGHER RATE OF RETURN THAN YOU CAN GET ANYWHERE, ESPECIALLY GUARANTEED. "In general taking money out of a 401k to repay a loan is a bad idea for a number of reasons.  Taxes and penalties if you are under 59 and 1/2 you will pay a 10% penalty on withdrawals from a traditional 401k plan. Then you are going add the amount you withdraw to your income in determining your current tax bill. If you make a large withdrawal you will likely push yourself into a higher tax bracket and will end up paying additional taxes than if you made several smaller withdrawals or waited until retirement when your income would presumably be lower. Taxes and penalties will mean you will need to withdraw ~225k in order to pay taxes and penalties while still having 150k to pay toward the mortgage (this assumes you are single and have no other income). You miss out on the growth your 401k could have had.  Lack of diversification the average person has the majority of their net worth tied up in their home and by paying off your mortgage you are putting even more of your money into residential real estate. By moving money from a 401k to your personal residence you could also lose some protection from creditors and lawsuits. Retirement accounts are generally off limits to creditors where as your house is limited by the homestead exemption (varies greatly from state to state). There are a few times when it might makes sense to use 401k money to pay off a mortgage. If you are older than 59.5 and have little tolerance for risk it might make sense to take the amount of money between your current income and the next higher tax bracket and ""invest"" the money in your mortgage each year. You would still want to avoid taking out a large chunk at one time though to avoid pushing yourself into a much higher tax bracket." "the most important information that you provided was ""I'm 25 years old"". You have a few years to save for a rental property. Taking a loan against your 401k only invites a lot of paperwork and a good deal of risk. Not only the ""if I lose my job I have to pay it back (in 60 days)"", but it effectively locks you into your current job because changing jobs also causes the same repayment consequences. Do you really love your job that much that you would stick with it for the loan you have? (rhetorical) One could argue that real estate is a good way to diversify away from the stock market (assuming you have your 401k invested in stocks). Another way to get the same diversification is to invest in REITs through your 401k. Owning rental property isn't something to rush into. You really have to like it.The returns and headaches that accompany it can be a drag and it's harder to get out of then stocks." I'm going to assume that the 401K is not a Roth.  If that's the case, no, you should not withdraw from your 401K to pay off your mortgage. You will pay taxes on the withdrawal as if it is income, and that loss will far exceed the 6% you are paying in interest on the mortgage (which is deductable, so may actually be less than 6% all things considered). The calculation is really more complicated, but in general, this sounds like a bad idea. Am I thinking correctly and can I do the 2 separate withdrawals? Yes. Is there anything else I'm missing?  Yes. For starters - instead of withdrawing 401k - why don't you take a loan out of it? This can be dangerous, but also can be beneficial - both for the same reason. The beneficial part is this: you don't pay neither the income tax nor the penalty on the amount you take out as a loan. I.e.: immediate saving of 35%. You can also get the full loan amount (up to 50% of the 401k balance) at once, no need to wait for the next year. You'll be saving on the difference on the APR between the credit card debt (which is usually huge) and the 401k loan (which is usually very low), and that will allow you to consolidate the debt and cover it quicker. The dangerous part is also taxes. In case you lose your job - you have to pay off the loan immediately (within 3 months). If you don't - the remaining balance will be considered as a taxable distribution and you'll owe the 25%+10% on them. But - if you don't lose your job, you win. And repaying the loan will revert your 401k balances back to the full amount, while with withdrawal - you cannot put it back (after 60 days are over, at least). So keep that in mind. Check with your 401k plan provider on the loan terms and costs (they'll charge some symbolic amount for managing the loan for you).