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April 16, 2018

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Using retirement accounts as emergency funds is the worst thing one can do. People typically need emergency funds when the market is down, so they're selling their portfolio at a lower price than they should

Yes, borrowing from a 401k is risky business and should only be done in extreme financial situations. Use your emergency funds instead...You have some, right?

401k loans are not double taxed. These two scenarios are equivalent, except that the first takes a $5k loan.

The part most people miss, is that you get to use those funds that were put in tax free for an after tax purchase.

This is not going to paste well from Excel (whitespace removed), but I'm going to try anyway. You'll just need to align columns yourself when reading this.

Gross Earning 401k Deposits 401k Repay 20% Taxes Net Earnings Bank Inflows 401k Balance
Baseline $50k $10k $- $8k $32k $32k $10k
401k Loan $- $(5k) $- $- $5k $37k $5k
Next Annual Pay $50k $10k $5k $8k $27k $64k $20k
Retire $- $(20k) $- $4k $16k $80k $-
Sum of Taxes:$20k

Gross Earning 401k Deposits 401k Repay 20% Taxes Net Earnings Bank Inflows 401k Balance
Baseline $50k $10k $- $8k $32k $32k $10k
401k Loan $- $- $- $- $- $32k $10k
Next Annual Pay $50k $10k $- $8k $32k $64k $20k
Retire $- $(20k) $- $4k $16k $80k $-
Sum of Taxes:$20k

However - it's still fundamentally a bad idea to borrow from your retirement.

Taking money from 401k is something I would recommend the least. Even though the current financial troubles may be resolved with its help, the number of problems that follow may make the situation much worse.

I like the part where you explain in what situations borrowing from 401k is a good idea. I've met several people who didn't have another plan and this was the only way out. If you do it wisely, no dramatic harm will be done.

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