401(k) Loan Calculator

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The 401(k) Loan calculator helps you determine if a taxpayer would benefit by taking out a loan from his 401(k) account to pay off a high interest rate credit card. The only 401(k) assets that are evaluated by this calculator are those involved in the loan.

An assumption of this calculator is that the payment amount for the 401(k) loan would instead go toward the credit card debt in the case where the 401(k) loan is not chosen. With the 401(k) loan, the credit card debt is immediately paid off. Without the loan, there will always be a balance remaining on the credit card debt at the end of the proposed 401(k) loan, because the credit card debt carries a higher interest rate.

At the end of the loan period, the 401(k) assets are converted to an equivalent after-tax dollar amount so that they can be compared to the credit card balance which is an after-tax dollar amount. The after-tax amount is arrived at by subtracting the taxes that are expected to be paid when the funds are withdrawn. Use the Combined Tax Rate section to indicate this tax rate.

Example

If a taxpayer has a 15% credit card debt of $10,000, should he borrow from his 401(k) at 4% to pay off this debt?

Field Input
Expected return on 401(k) investments 6%
Interest rate on credit card 15%
Amount borrowed $10,000
Interest rate on 401(k) loan 4%
Payments per year 12
Years of payments 3
Federal tax rate 28%

In this example, the taxpayer would have $2,065.23 more in after tax dollars by paying off the credit card with the proceeds from a 401(k) loan.

The 401(k) value after loan repaid field for the With Loan column is the amount of the repaid loan plus interest plus return generated from the time the funds were repaid to the end of the loan.

Diagram: Amount of the repaid loan plus interest plus return generated

In the Without Loan column, this amount is the loan (not taken) plus the return generated by leaving the funds in the 401(k) account during the period of time of the loan.

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