Here’s a lesser-known strategy for some medium-term liquidity. In general, borrowing against your assets only work with two rules:
- You’re borrowing against a long term asset (house, Bitcoin, 401k)
- You’re using borrowed cash to put into another long-term asset, or you’re paying off high-interest debt
A 401k loan is unique because all the interest you pay goes 100% back into your 401k since you are borrowing against yourself.
FYI this a 401k-only thing. You can’t do this with an IRA.
You have to pay back the money within 5 years. Luckily, that’s less than Bitcoin’s 4-year halving cycle, hint-hint.
Generally, it works based on the rules set up by whatever service is managing your 401k. E.g. if Fidelity manages your 401k, they have their own rules for it on top the normal, legal limitations.
The caveat of paying off high-interest debt only works if the interest rate you pay on borrowing is less than what your other debt is (i.e. credit card).
Risks
If you can’t pay back and default, you now owe taxes on what you withdrew as well as a 10% penalty for early withdrawal (since it essentially becomes a distribution).
You may have to pay back immediately if you leave your job, so this does tie you down to your work. If you have your own business, that’s obviously not as much of a risk.
You’re also losing some minuscule money since the interest you pay is with after-tax money. But again, the upside the liquidity should more than make up for this if you’re not investing in something dumb.
As always, do your own research and take action at your own risk.
