However from a multitude of recommendations and commentaries I have read published by financial planners holding professional credentials the industry seems split as to whether a 401k investor should borrow against their investment holdings.
The Economics of 401k Investing
How many 401k investors ever do the math for leverage investing in to their fund, and where are financial advisers, accountants, planners and life agents in that respect?
It appears they have all gone for a walk together – leaving the baby in the bathtub alone.
For an Economist borrowing to invest in your 401k Plan is far superior in terms of returns, to non-geared investments
First get real and recognize there is no point playing Mickey Mouse with your Retirement Investing.
The maximum contribution allowable in 2021 in to your 401k as a Personal Contribution is $19,500.
That is what you need to borrow to put in to your fund this year.
How do you feel about an additional $6,000 tax rebate (every year?)
This is Not a Story – it is REAL MONEY, YOUR MONEY – going down the drain.
Care to close your fist on it?
Professional Financial Advisers have a lot to answer for in that respect and seriously bring themselves in to disrepute – displaying incompetence in the field which they purportedly hold qualifications.
Our recommended strategy involves salary repackaging and diverting wasted tax dollars in to your 401k Plan by:
- first allowing Employers to re-capture cash outflows,
- reduce wage costs – which include FICA for them and Employees,
- and arbitraging income tax differentials.
Consider this outcome for Employees:
- Employer recaptures $21,500
- $6,000 (otherwise lost by workers as Income Tax)
- plus the $14,000 of disposable income otherwise in the hands of a worker after tax on their earned income
- including $1,500 of FICA Employers would face if $20,000 had been paid as salary instead of being sacrificed by a worker.
The Employee receives $20,000 in to their 401k instead of $14,000 disposable income. ROI can be calculated using those figures *(42.8%).
Using Leverage for the $20,000 investment @ 5% the cost in terms of Cash Flow for an Employer is just $1,000 for the $20,000 investment.
- In the process $6,000 Cash goes to Employer – which can be retained or used to reduce the loan amount needed to make the 401k contribution.
- Employer saves $4,200 in tax,
- worker saves $6,000 in tax
- (and has $6,000 plus $14,000 – total $20,000 go in to their 401k as an Employer matching contribution)
- Exit Tax
- Robs Plan