@catspaw21 wrote:
Thank you, your answer makes a lot of sense. If I stopped my pre-tax contributions, I would lose out on the match. I may considering repayments of some kind still, simply that I may need to borrow again from my 401k and the amount I would be able to borrow would be substantially more than the repayment. I know it is not the best option, but I am in the middle of a divorce and may also soon be relocating out of state and my options are limited. As for the long term benefits as you stated, I will be 59 and a half in February 2021 so maybe I will be able to reap them sooner rather than later. Thank you again.
You've got a complex situation. You may want to see a proper financial planner. Here are some additional thoughts that may be helpful.
If you can reduce your 401k contributions and still get the match, you might want to make loan repayments with the rest. For example, if the maximum match is achieved if you contribute 5%, but you are currently contributing 8%, you could put that other 3% toward loan repayments instead of toward new contributions. You won't get an immediate tax deduction, but it will reduce your taxable withdrawals later.
If you can reduce your 401k contributions and still get the match, you might want to contribute to a private Roth IRA rather than making either new contributions to the 401(k) or paying back the loan. However, depending on your other income, you might not be eligible to contribute to a Roth IRA. The advantage of a Roth IRA (if you are eligible) is that you can withdraw the principle contributions at any time for any reason without penalty. The disadvantage is that you can't withdraw earnings until you are over age 59-1/2 AND the Roth IRA has been open 5 years.
I would not contribute to a Roth option within the 401k in your situation. You won't be able to withdraw ANY money as long as you are still employed by that employer, unless you meet the definition of a "hardship" withdrawal, and even then your earnings will be taxed if you have owned the Roth option for 5 years (I think--early withdrawals of Roth option 401ks are extra-complicated.)
In fact, turning 59-1/2 does not help you at this point unless you have other retirement funds not in a qualified workplace plan, because you can only withdraw from the workplace plan after separation. (And, if you do separate from service, you can withdraw from a 401k without penalty at age 55 or more, not age 59-1/2.)
If you have money now but think you might need it later for emergency spending, I would try putting money in a Roth IRA if you are eligible. Failing that, a regular broker account might not be too bad because there are no penalties and you only pay tax on your gain. A third strategy would be to push money into the pre-tax 401k knowing that if you take a loan again and default, you won't pay the additional penalty after this year. It can be quite complicated as you see. Good luck.
