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shakatah · Mar 20, 2009, 09:49 AM

Wondering if anyone can provide some advice on whether it makes sense to borrow from my 414H to fund a taxable brokerage account.

Factors to consider:

414H loan would be at under 3% annually.

414H account is in a defined payment plan which has a set/stable gain annually and they structure the loan repayment so that you stay on track.. i.e. pay the money back with interest to cover the annual return of the fund so I won't be giving up any compounded earnings by taking the loan.

My retirement is based on years of service and top earning years, has nothing to do with how much I contributed.

With all of that in mind... does it make sense to borrow from this account to fund a taxable brokerage account? Wondering if with current stock prices it makes even more sense as a long term strategy.

ebaines · Mar 20, 2009, 10:11 AM

I don't understand this 403(b) of yours - you say it's a defined benefit plan? This really doesn't sound like a 403(b) to me - a 403(b) is a defined contribution plan. Here's a link to a FAQ on 403(b) plans - does this sound like your plan?
403(b)wise : 403(b) FAQs

shakatah · Mar 20, 2009, 10:58 AM

Thank Ebaines. Brainfart.. confusing it with my plan from a previous employer. The plan is actually a 414(H). The state determines the % of your pretax income you will contribute annually. In retirement, payment is determined using a formula based on number of years of service, highest earning years and age.

All else in the question is an accurate representation of how the plan works.

ebaines · Mar 23, 2009, 12:40 PM

I'm afraid I don't know what the rules are around 414(h) plans. But if you can indeed borrow from this account for whatever purpose you want (no need for a "hardship"), and the interest rate is 3%, then it sounds like a pretty good source of funds. Certainly cheaper than any margin account you might get for investiments. Personally I do not think borrowing money for investments makes sense for most people. If your investements go south will you still have adequate cash to repay the loan on time? Also keep in mind that the 3% interest rate is not deductible, and you're putting the money into taxable investments. So you need a return > 4% or so to break even.

shakatah · Mar 23, 2009, 01:28 PM

Thanks ebaines.

No "hardship" requirement, would hardly miss the biweekly payment amount, would be able to pay it back if I lost it all and job is pretty secure. Under the plan rules, members are able to borrow up to $50,000. Must do some research on whether the 3% interest is deductible as I hear the rules are pretty tight but I will be paying it to myself to keep my retirement account on track so I am o.k. with it even if it isn't.

Was just wondering if there was something I was overlooking since I have searched the web extensively and have found no information on this strategy and it would seem to be a excellent strategy for someone with decades to retirement (I am at least 20 years away) ESPECIALLY with current stock prices.

Ironic thing is from what I gather, the only drawback of borrowing from this plan is that you are paying back the funds with aftertax income. So the way I see it, borrowing $50K to invest is the same as saving $50K aftertax dollars over time, except that by saving it over time I give up the opportunity to purchase $50K of stocks at today's prices with a 20 year horizon and maybe 5 years of gains/losses (I could save around 10K a year). Timing is everything and stock prices won't be this low for very long.