Why shouldn't I consider a 401k loan to myself within my bond allocation?

I have seen broad advice against 401k loans. I question this. Why shouldn’t I consider a 401k loan to myself within my bond allocation?

Assuming I have trust in my employment cash flow and taxable assets to be able to cover loan payback should I leave my job, is there any reason to not allocate a portion of my age-appropriate bond allocation to a 401k loan to myself? I’m supposed to have 30-40% bonds at my age. So how about a loan of 5-10% of bond allocation, or 1.5-4% of my total invested assets to myself?

In an abstract sense, I can assess my creditworthiness better than I can that of some writer of commercial paper.

On the loan side, I kind of don’t care what I’d use this for. I don’t buy “opportunity cost” as material (but convince me if I am wrong) if the amount my investor-hat loans to my daily-life hat is as an investment, limited by bond allocation.

Wearing my daily-life hat I would have to decide if a loan for consumption (say a vacation; I could have bang-up trip for 2% of net worth) would be worth it, and the payback cash flow impact acceptable. My investor-hat shouldn’t care at all.

Is this clarifying?
The internet suggests at my age I should be 60/40 stocks/bonds. I am trying to choose a bond investment.

Oh, it looks like my 401k can loan $5000 to an individual at 4%. I have information to believe this individual is as safe a risk as the United States Government. 4% is a better return than a Series EE bond.

Why shouldn’t I have my 401k loan the $5000 to the individual as part of my bond allocation?

For this decision, I don’t believe I care what the individual is going to do with the money; it happens this individual is me.

What is wrong with this reasoning?


2 Responses to “Why shouldn't I consider a 401k loan to myself within my bond allocation?”

  1. A better idea if applicable is to borrow 50K (max allowed) to buy a house and pay interest to yourself instead of a bank. And none of that origination and closing fees lost to the lender

  2. At first blush, this seems like it makes sense – assuming, like you say in your question, that you are perfectly confident in your ability to repay (even if you need to pay the balance in full if you lose your job), then this seems like a guaranteed 4% return, and a reasonable part of your retirement portfolio.

    Where it falls apart, though, is that you’re paying yourself. You’re just taking the money out of one pocket and putting it in another. So really you’re getting a guaranteed 0% return. You’re losing the compounding growth of the loan amount while it’s out of your accounts, and the fact that you can afford the 4% interest means you could have been putting that into a requirement account as well aside from the loan – so it doesn’t really count as “interest” in the sense that your money is passively making money for you.

    So ultimately: no, it shouldn’t count as part of your bond allocation.