1. Cash – few workers have savings of $19,500 needed to make a 401k Maximum Personal Contribution

2. Borrow from their established Own 401k fund – while the interest charge is irrelevant (as it really amounts to paying yourself to borrow your own money) a difficulty arises in future years because of limits on total borrowings of a fund member. Which will require external borrowings at a future time.

3. It is economic to borrow money needed for the $19,500 Personal Contribution. Just work the numbers to see the ROI. Returns using Leverage are roughly 20 times that of using your own cash. Thus any cash available can be invested externally and geared 3 to 5 times – or used to service structured loans without cash deposits – and create better than thousand percent ROI.

The difficulty with borrowing to invest is not the entirely rational economics of the investing strategy; it is the non-rational emotional condition of most people who lack the understanding of economic logic required in order to swallow the magic investment pill. Many financial planners belong to the same brigade – often negative to the idea of borrowing from 401k Funds. Which should disqualify them from having spurs for providing rational financial advice to timid sheep.

The purpose for borrowing 401k contribution money is to better manage cash flow so you end up at least $300,000 better off within 15 years and $500,000 in 25 years if you stay employed. Is that a satisfactory reason?

4) It is less imperative for the Employer to borrow the money for making their matching contribution to employees Personal contribution. It has no bearing on the employees retirement benefit. The entire benefit of the employer borrowing to make 401k matching contributions accrues to the employer. It is simply a matter of Cash Flow Management Efficiency – regarding Tax Management, Investment Leverage and ROI decision making.

5) Once an employers matching contribution is in the employees 401k Fund there should be $39,000 available for allocation. A maximum of 50% of the funds in the 401k maybe borrowed by the member – for any purpose. The best use of those funds might be to make up for any shortfall in disposable earnings stemming from a prior decision to allocate income to 401k contributions or due to salary sacrifice reducing income received from the employer.

Two other reasons for borrowing from your 401k might be to pay down the external borrowings with a cheaper source of money, or simply for external investing, Or to use to money to pay next years personal 401k contribution – where a bit of magic occurs – if you trace through the money used to make the prior years tax deductible 401k contribution. Here you have the opportunity to use the same money again for a second contribution and over and over again each year until the bell rings.