Use it or lose it: Borrowing to max out retirement savings?

I'm doing this with 0% money. I will pay it off next year because I will work the full year.

Seems to me lot a like bigger upside than a simple taxable savings account. I have 40 years of tax deferred growth. I couldn't have maxed out my 401(k) and IRA without it.

Of course next year I'll have enough to do both and pay back the borrowed money. But I've been floating for 3 years straight so I'm not worried about having to do it all next year even though I could.

I think your original logic is correct, as long as you know you can always handle the loan repayments.

And while your investments can go up or down in any given year, the probability of beating your after-tax
interest payment is very high over a 10-30 yr repayment term.

The danger, of course, is that you take out a loan when you really could have funded the plan with current income.

alukard said: Last year I decided that despite getting most of my grad school cost reimbursed from my employer that I would take out substantial student loans so that I could for the first time fully maximize my retirement account contributions. Up until that time I could only manage about 10% of my salary into my 401(k) and an IRA was a distant dream. Now I've already maxed out both this year and the student loans I took out to do so are in deferrment so I'm only accruing interest on roughly half of what I borrowed.

My logic was simple: the use it or lose it contribution limits for the various retirement accounts meant if I didn't put the money in there now, I'd never be able to make back that opportunity. And at 6.8% interest (going to 5.8% upon repayment, and tax deductible at that) it seemed at the time a no brainer.

Now I'm having buyers remorse and wondering if my hair brained scheme was all it appeared to be at the time. Having a better understanding now of what saving for retirement really is (i.e. just because it doesn't have an official "retirement" title doesn't mean it can't be used as a retirement fund) makes me wonder if I wouldn't have been better off just doing what I can now, and then using any extra income I'd have in the future after maxing out my retirement accounts to buy some non-deductible savings vehicles or funds instead of using the money to pay back student loans...

So I ask, is borrowing to max out retirement contributions in the current period a good idea, or a recipe for disaster?

It doesn't make sense for most people to max out their 401k. I think it would be foolish to take out a loan to fund your retirement accounts.

PH0ENIX said: aeiouy said: It doesn't make sense for most people to max out their 401k. I think it would be foolish to take out a loan to fund your retirement accounts.
What are you basing this off of?

I think maxing out your 401k and IRA is the smartest thing you can do when you're young, given the power of compounding has longer to work its magic. In fact, I would max out my 401k and IRAs before paying off credit card debt, because of the use-it-or-lose it factor. Then I would work hard as hell to pay down that debt.

I believe his point was that once you have met the matching part of your 401k, the incremental benefit is probably not worth borrowing to be able to fund it (unless, like the OP, you can get that money at a lower than market rate.)

Yes, invested money compounds....but interest on borrowed money compounds too. The question is really about what is optimal.

I'm doing something similar. I'm in law school and took out $8K (as part of a larger AOR) to fully fund Roths for both my wife and myself. When I graduate I will no longer be eligible to contribute to a Roth, so I see it as a good investment for the future. My plan is to continue doing this through 2009 (I'll fund 2010 myself and then won't be eligible in 2011) and keep moving it around on 0% cards. I'll pay it off within the first year of working and then start aggressively attacking my student loans.

The relative benefits of tax-free growth are astronomical (assuming the U.S. doesn't eliminate Roths or taxes some time in the next 40 years). I don't know if I would do it for 401(k), but that's your call.

dandan50 said: ltcm said: I'm doing something similar. I'm in law school and took out $8K (as part of a larger AOR) to fully fund Roths for both my wife and myself. When I graduate I will no longer be eligible to contribute to a Roth, so I see it as a good investment for the future. My plan is to continue doing this through 2009 (I'll fund 2010 myself and then won't be eligible in 2011) and keep moving it around on 0% cards. I'll pay it off within the first year of working and then start aggressively attacking my student loans.

The relative benefits of tax-free growth are astronomical (assuming the U.S. doesn't eliminate Roths or taxes some time in the next 40 years). I don't know if I would do it for 401(k), but that's your call.

I agree. Good plan in your situation, because you'll likely be ineligible soon after graduation.

Thanks - I thought about it for a while before acting, but I think it makes sense in the long run.

To anyone considering a similar track: just make sure you have an emergency fund built up in case something goes wrong. My wife and I have about $15K saved up that we could use if 0% offers dry up, the account is down below principal level, etc., it always makes sense to have a safety net.

I am applying the "use it or lose it" principle as well, although not through borrowing.

My wife was on maternity leave for about 5 months of the year, thus she was not able to fully fund her 401(k) with the max contribution at her regular contribution rate. In order to ensure that she tucked aways her $15.5 this year, we jacked up the % of her salary that she contributed in order to meet the 15.5K in the 7 months that she was working.

I was also in the same position, although for me, I was not working for 6 months of the year due to being let go at my prior employer. I jacked up my 401(k) contribution at my new job so that by 12/31, I would have the full 15.5K.

Luckily, we could afford to do so without much effect on our daily lives.

I truly believe that the 401(k) and Roth/Traditional IRAs are extremely useful tools for the common family to easily become millionaries come retriement. IMO, passing up a chance to put in the full amount each year (if you can afford it) is a big mistake.