Tuesday, May 14, 2013

Is it Debt?

The other day when I talked about the RESET, fellow blogger 444 posted this in the comments:

"I would not list the 401K loan along with other debts, since it's not a true debt. You took money from your own account when you accessed that money, and you are replacing it over time; the "interest" is really just additional amounts you are adding to the account. On a balance sheet, the 401K is an asset and it's smaller after having accessed that money, so that should be the only way the transaction is noted. The smaller account balance shows where the money was shifted.

Whether or not you list assets in your public accounting of your financial situation, don't show the 401K loan as a debt. It's implied that debt is owed to outside entities; debts to yourself aren't debts in the usual sense of the word. Give yourself credit for having brought your consumer debt down considerably."

So my question to you all is this....do you consider a retirement loan "debt?"

444 was (and I assume still is) a supporter of the loan.  As she stated, we accessed money that was ours to start with, and we used it to lower our consumer debt (since it paid off the CCs and Lending Club loans").  And yes, a retirement account is an asset, and if you withdraw money, then you just have a smaller asset.  In all of those senses, she is right.

As long as you look at all of this as purely "business," all of this is right.

BUT.....part of getting out of debt is emotional.  The toll it takes on you while you are working on it is exhausting at times.  So I have a hard time just seeing the numbers as numbers (although I do love me some spreadsheet porn).

If we didn't count the loan in the debt total, our debt would be $42,898.55.   The CC debt would account for 13%, vs the 8% is accounts for now.  And let's really be honest.....the retirement loan paid off consumer debt.  So by not counting it, it doesn't reflect the true picture.

Also, we pay $380.15 a payperiod for this loan.  That is $9,883.90 a year.  Without counting this transaction as debt, it appears that we are contributing almost $10k per year to our retirement account.  And in most circles we would get a high five for that.  But then others would say put that 10k toward the "true debt" and knock it out faster.

Well, that is double dipping.

I think it is important to note where that much money is really going, and why it is going there.  It is going there because we had incredible consumer debt at very high interest rates, and we took a calculated risk to eliminate as much interest as possible.  So we took the loan.

In 3 years, we will have an extra 10k to play with (and in all honesty, it will probably continue to go into the retirement account).  But we may choose to put it toward remaining debt; we may choose to save it up for a year toward a vehicle.  I don't know.  Too far in the future to predict that.

But for us, this loan is debt, no matter what a spread sheet says.  So 444, I get what you are saying.  And there is a logic to your case, but for now it is going to stay as is.


  1. If you don't owe it to someone else, it's not debt, imo.

  2. Well, if you HAVE to make payments until some terms are met, I consider it a debt. I may be different than other people, because when I borrow money from myself (ie, that never-lasting $2k car fund I keep killing every 9-12 months), I make a payment schedule and "pay it off". Right now, I am paying that fund off, because I took a loan on myself. This may be different, because if something were to happen and I needed $650 this month, I may skip a month, but I probably wont (I'm strict). But for the 401k, you don't have a choice. You don't have your own terms (sort of), because it has to be paid in full, and once that is done, you get the control back. (And I know you said it is very off in the past, but if you still have debt by the time the loan is paid, I'd recommend you pay debt first before continuing to contribute to your 401)

  3. 444 is technically right, but I would feel emotionally it is debt. My money runs with my emotions. At lest my emotions have gotten me into more trouble with money than my technical brain so I would list it. But it is going down!

  4. It's debt. Like Tanner said, it may be your money, but you have no control over it. And should you (or DH, don't remember whose account it is) get laid off, you would be required to repay that money immediately. That's debt. And what if a better job came along that you wanted to take but couldn't because you didn't have the cash to pay off the 401k loan? The very fact that it limits you should make you think of it as debt (which I know you do, I am probably speaking to 444 on this :). I think you have the right attitude about it. The money was used to pay off debt and you are now having to pay it back so it is debt, no matter whether it's "good" debt or not. All in all, you're doing great. Keep up the good work!


  5. I agree with Tanner, Kim & Sarah & Jenny -- I count mine as debt too

  6. I had no idea that if you lost your job you'd be responsible for it. That definitely changes how I think about it.

    Just shows...I have a lot to learn about money still.

  7. I would consider it a debt since you have to pay it back.

  8. You don't "have to" pay it back. All a 401K is, is a savings/investment account, and most people have additional contributions made by their employer (a "match"), which is a huge perk and incentive for starting and maintaining an account. But the contributions made by your employer are not accessible by you for borrowing purposes up until the time you are fully vested, so there's no way you'd owe anyone else if you borrowed from a 401K and defaulted (stopped replenishing the balance.)

    Since a 401K has special tax treatment (the other huge perk and incentive) like having your contributions count as before-tax dollars (because you'll be taxed on the money later when you make withdrawals in retirement, unless it's a Roth 401K), there are dis-incentives in place to discourage borrowing and not replenishing. Those include a tax penalty levied on money withdrawn but not replaced (and this is meant to repay Uncle Sam for the pre-tax status that you enjoyed while making contributions) and having the money taxed as income. Again, this is simply because if you don't play by the 401K "rules," you have to give back the perks you got when you set out to play but didn't follow through. It was income when you used it to contribute, and the gov't allows you to set it aside until retirement tax-deferred, but if you take the money back before retirements (and outside of other allowed distribution scenarios), you have to treat it as the income it really is/was.

    So, as you can see above, it's still your money in your own account, and no one forces you to pay it back (there are no collection efforts, in other words - you're borrowing from yourself and repaying yourself); the penalties everyone quotes as evidence that you "must" pay it back are simply an attempt to reimburse the gov't for the special tax treatment, in the event that 401K money is borrowed and not replaced.

    1. We will have to agree to disagree on the semantics of this point, 444. When you take out the 401k loan, you sign documents agreeing to the terms of repayment. If you default on those terms, you are hit with stiff tax penalties which will significantly increase the cost of the loan to you.

      You will not only pay the tax which you would have owed had you not set it aside in a pre-tax account, you will also be assessed a penalty tax for withdrawing the money early - an additional fine, if you will.

      You don't "have" to pay any loan back. But if you don't, there are going to be consequences. A debt is a debt, and there are consequences for defaulting.

    2. And please remember....this is not a 401K. It is a retirement account, but it is through the federal government, as G-man's employer.

      On paper, it may not be considered debt, but I think the majority of people feel that it is an obligation of money, and therefore, it is debt.

    3. Yep, Sarah and Jenny, you said the same thing I said - which is that there are tax consequences of not replacing money that was taken out of a pre-tax account, since the terms of that account specify that the money not be withdrawn until retirement (for the most part, with certain exceptions) and taxed then. So, if you don't replace what you took from the account, you have to treat the money you originally put into the account as regular income. It's still your money, going in and coming out, no matter when taxes are paid on it.

  9. If he lost his job you would be up a creek. It's like saying a home equity loan isn't debt. It's your equity. But it's debt.