People spend big bucks to add another room or remodel a room, would any of you consider a loan (not a withdraw) from your 401k plan to pay for solar? Why or why not?
How to pay for solar?
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IMHO, borrowing from a 401K for any reason other than an absolute emergency is bad idea. Absolute emergency is life or death after you have already raided your emergency fund. Folks forget that a loan from a 401K has to be paid back if the voluntarily or involuntarily leave the company. If you don't, its regarded as withdrawal and you have to pay a penalty. Many folks who borrowed from their 401Ks to add rooms during the real estate boom ended up losing the house and their 401 K. The right day to do this is build up an emergency fund, the save up the cash and install solar once you done all the low cost conservation upgrades. If you really want solar now you could permit a microinverter based system and buy one panel at a time, you risk obsolescence on the panels but it would get you on solar without borrowing.
I agree with peakbagger to a point. A lot depends on the interest rate you are getting on the 401K. With solar prices where they are you can buy a typical system installed for roughly $4 a KW installed and if it's a well designed system the return on investment (ROI) will be more than most loans (my current system is 10% ROI) after the 30% tax credit. IF the government does away with the tax credit you've made a wise investment, if not still worth researching. There's LOTS of things to study ( I researched for 3 years) but my system has been a very good investment even tho it's only 3 years old.
Where2
Feeling the Heat
Based on the returns I've been getting in my 401k, I wouldn't pull a loan from mine. There are too many other cheap available funding sources right now. You also have to ask yourself if you're going to be in the house long enough to start getting real ROI and/or be able to get your investment back if you sell. If your house is already valued toward the upper end of your market segment and you don't intend to stay more than 5 years, you may have a difficult time getting "whole" again when you sell. I'm not convinced real estate appraisers know how to determine the value a PV system provides to a home.
I never intend to sell either of the deeds my name is on, so it's a given that a PV system is going to provide plenty of ROI for me. My first PV system is ~18 months old. I've collected around $900 total return (sunshine) over the last 18 months in addition to the tax implications. If you're doing a PV system, 2015 is the year to do it. The PV system tax incentive is a credit toward your tax liability, not a guaranteed refund. If your household income isn't high enough, you will have to roll some of the PV value forward, and there's no guarantee 2017 will offer any credit if you couldn't collect it all in 2016. I get to see how that all works in doing my 2014 taxes, because 2013 wasn't a high point of my working career, despite affording me the opportunity and time to install a PV system on my roof.
My second PV system is being financed using the same methodology I used to finance my first PV system. I'm brown bagging my lunch, and watching what I spend in every other area of my household finances. The guys I work with who "can't afford solar" go out to lunch every day, and drive cars less than 2 years old. I'm driving an 11 year old VW that gets 40mpg (City) with no payments.
I never intend to sell either of the deeds my name is on, so it's a given that a PV system is going to provide plenty of ROI for me. My first PV system is ~18 months old. I've collected around $900 total return (sunshine) over the last 18 months in addition to the tax implications. If you're doing a PV system, 2015 is the year to do it. The PV system tax incentive is a credit toward your tax liability, not a guaranteed refund. If your household income isn't high enough, you will have to roll some of the PV value forward, and there's no guarantee 2017 will offer any credit if you couldn't collect it all in 2016. I get to see how that all works in doing my 2014 taxes, because 2013 wasn't a high point of my working career, despite affording me the opportunity and time to install a PV system on my roof.
My second PV system is being financed using the same methodology I used to finance my first PV system. I'm brown bagging my lunch, and watching what I spend in every other area of my household finances. The guys I work with who "can't afford solar" go out to lunch every day, and drive cars less than 2 years old. I'm driving an 11 year old VW that gets 40mpg (City) with no payments.
Wisneaky
Minister of Fire
An old feller told me a story one time about how all his friends put a lot of money into their 401k and were hoping to use it for retirement. He said some of them didn't live to retirement age and the ones who did either passed shortly after or were so bad off that they didn't get to use the money for much. He said he decided against putting any away for retirement and had a great life being able to buy what he wanted when he wanted. Since he told me that story 10 years ago I haven't saved a penny in 401k. When I left my previous job I pulled my 401k out and paid for my house in cash and no longer have to worry about any house payments or rent.
Well I put money in my 401k and retired at 59 so its not all bad, better than working ha ha.
Anyways borrowing from a 401k to finance solar is OK by me, you just repay the loan to yourself with interest.
If you lose your job during the repayment period the outstanding balance is paid, which is great.
But at the end of the year you will owe taxes on the extra income along with a 10% early withdrawal penalty.
So def don't do if you feel like you will soon leave your job or your company may soon downsize etc.
Anyways borrowing from a 401k to finance solar is OK by me, you just repay the loan to yourself with interest.
If you lose your job during the repayment period the outstanding balance is paid, which is great.
But at the end of the year you will owe taxes on the extra income along with a 10% early withdrawal penalty.
So def don't do if you feel like you will soon leave your job or your company may soon downsize etc.
In addition to the caveats mentioned, the interest rate on the 401k loan that you would pay yourself might make the deal attractive, depending on your financial situation. I would consider the loan only if my financial situation was such that I could easily pay off the loan and if the interest rate return was attractive. Another alternative would be a very low interest home equity loan, but again only if you could easily pay off the loan. I am waiting for a quote on adding 5kw of additional PV, and may consider a draw on my home equity line of credit to pay for the system, and then use the net metering utility payment to pay off the LOC. The rate of return on the PV is greater than the interest rate on the LOC.
In general I don't like to borrow (neither a borrower nor a lender be), and am a strong advocate of only buying with cash
and if the cash isn't there, save it up and then buy.
In general I don't like to borrow (neither a borrower nor a lender be), and am a strong advocate of only buying with cash
and if the cash isn't there, save it up and then buy.
Sounds like you are not a fan of the fable of the ant and grasshopper?
Its sad when folks are totally oblivious to reality, SS is welfare and anyone who thinks that they are going to retire on it alone are going to be really disappointed. Statistically folks are living longer and are retired longer. Pensions are long gone for the majority of the population and the only alternative is 401Ks. Sure folks can be self disciplined and save up on their own, but the majority of the population are not. 401Ks also are not typically accessible if someone gets sued. Cash in the bank is. Someone slips on your front porch and you lose your retirement savings. No one plans for it but it happens.
I must disagree with SS being welfare, it is one of the biggest deductions out of my paycheck, how is that welfare?
Now that being said I would look at a 401k loan just as any other loan, you are screwed if you lose your job with a line of credit, home equity loan or outright loan. Like jdogg said, at least with a 401k loan its paid off then, tax implications yes, but no payments...plus you have at least the lights on in the meantime.
I would also agree that depending on SS alone is going to be hard also if we aren't robbed of it by then. But wouldn't it be a plus to at least have your home paid off and no light bill come retirement time? We all know the price of power will go up and not down. If you do save and save in the 401k it seems the insurance industry will get the loins share and the rest will go to bills anyway...isn't that what the 401k is for? But if you could eliminate one more bill with a 5 year loan for 25+ years...why not?
It would seem that the solar credit is going to be done soon and if you don't have the money now, the price just gets more expensive, so it would be a 'now or never' deal the way I see it...baring some huge advance in technlogy within the next year...which I can't see happening right now.
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I will qualify my statement, SS is not entirely welfare, but if you look at the formulas, the high income payers (up to the current SS Max) subsidize the low income payers. SS admits this and barring major reform I dont see it changing for the better and expect means testing is next. I guess I should modify it to retiring on only SS is like living on welfare for many. I don't follow the insurance company tie into 401 Ks so I guess that one I cant respond to. My house was paid off while I made contributions to my 401K.I generally run my cars 8 to 10 years until they become unreliable and I don't spend a lot of bucks on expensive vacations so I can do both. I have one old 401K that was rolled into a IRA that I have left alone. I wasn't with the company long and it had less than 5 K in it when I left. It has been in the same very conservatively rated balanced fund since then and its now worth $56K. Had I realized that when I funded that plan I would have put in a lot more. Granted inflation eats up some of the value but that's still significant appreciation. I figure that's about 2 years of expenses the way I live so that's two years less I need to work. I don't want to jeopardize that by taking a loan. Folks forget that when you take a loan you are out of the market for the amount of the loan. Generally the volatility of the market averages out over five years but any trading less than a 5 year window and the participant is taking a chance that they sell low and now get to buy back high. Sure they get a piddling interest rate but overall if the money is in reasonably diversified fund, they 5 year market appreciation is going be far higher than any interest they pay themselves.
Prices have changed drastically on solar, I have three arrays built over a 12 year span. Each time I built one solar cells were at a record low that wouldn't last, the first set were at a record low at $6.60 per watt, the subsequent panels were a record low at $0.98 and the last set were a record low at $0.93. My inverters had a similar price drop. Despite predictions to the contrary I expect the price will continue to drop but at a slower rate. There is some very radical technology in the pipeline. Even though it feels good to get a tax credit even without one solar is far cheaper than it was 5 years ago and it will be cheaper 2 years from now even if the tax credit expires, which is highly doubtful as its politically popular program.
Feel free to justify taking a loan on your 401 K plan, plenty of folks will gladly encourage you as they want your money now, but I still advocate waiting a year and saving up cash and then putting in a basic expandable system. All you need is the envoy trunk cable a new breaker on your electrical panel, a solar panel, racking from a known manufacturer and a microinverter and you are in business. From then on all you have to buy is one more panel and microinverter and plug it into the trunk cable. Eventually you run out of racking and have to buy a couple of more lengths. Then add panels when you can pay cash. That's what I did, I started small and added small additions when I had the cash. I did it in big steps but with microinverters I don't even have to worry about panel incompatibility (expect for the looks ) I am now generating net electric power and haven't paid a power large power bill for 11 years and have paid for zero power for 4 plus I am heating my house in Northern NH with my surplus anytime its over about 20 degrees.
Prices have changed drastically on solar, I have three arrays built over a 12 year span. Each time I built one solar cells were at a record low that wouldn't last, the first set were at a record low at $6.60 per watt, the subsequent panels were a record low at $0.98 and the last set were a record low at $0.93. My inverters had a similar price drop. Despite predictions to the contrary I expect the price will continue to drop but at a slower rate. There is some very radical technology in the pipeline. Even though it feels good to get a tax credit even without one solar is far cheaper than it was 5 years ago and it will be cheaper 2 years from now even if the tax credit expires, which is highly doubtful as its politically popular program.
Feel free to justify taking a loan on your 401 K plan, plenty of folks will gladly encourage you as they want your money now, but I still advocate waiting a year and saving up cash and then putting in a basic expandable system. All you need is the envoy trunk cable a new breaker on your electrical panel, a solar panel, racking from a known manufacturer and a microinverter and you are in business. From then on all you have to buy is one more panel and microinverter and plug it into the trunk cable. Eventually you run out of racking and have to buy a couple of more lengths. Then add panels when you can pay cash. That's what I did, I started small and added small additions when I had the cash. I did it in big steps but with microinverters I don't even have to worry about panel incompatibility (expect for the looks ) I am now generating net electric power and haven't paid a power large power bill for 11 years and have paid for zero power for 4 plus I am heating my house in Northern NH with my surplus anytime its over about 20 degrees.
mass_burner
Minister of Fire
mass_burner
Minister of Fire
I know folks here are using 401k as a catch-all, but you should transfer your 401k out to a self managed IRA asap. The mutual fund fees incurred can really add up.
It certainly makes more sense to borrow money for solar installation than to just renovate some rooms. The former can be seen as an investment where you recoup the cost through lower electricity bills. The latter may work the same way but only once you sell the house and the return is much less guaranteed. I would compare the potential loan payments with the kWh-sensitive portion of your electric bill. The difference is the amount of additional expense you will have each month. If that is a reasonable amount I would suggest go for it. You could also calculate your total return. For that you would need to assume an average service life of the solar (e. g. 25 years) and by how much that reduces your electric bill. Don't forget to add in a steady inflation rate of at least 1% to 2% for your bill each year. That will tell you if it is a worthwhile investment.
As for the 401k loan, I would also compare that with the rates for a home equity loan. If you haven't (re)financed lately, with current interest rates you will get additional savings even when upping the principal to accommodate the solar.
This old feller's friends are the minority. The majority of people that go thru life just buying whatever they want end up in a world of hurt in their senior years. You also need to consider how long people live nowadays. You retire at 65 without any real retirement savings and you could be eating ramen noodles and living in poverty for 30 years. No thank you. I feel that as a man it is my duty to provide well for my family for as long as I live and beyond that. So, I'll keep loading up the 401K with as much $$ as possible for as long as possible.
Wisneaky
Minister of Fire
When I retire my social security check that I paid into my whole working life will be more than enough to pay the little bit of bills I have each month. I'm going to enjoy my life before I get too old to do anything. The moral of the story was some people don't live to use that money that is put away or are so bad off that they don't get to enjoy it and miss out on a lot of things they could of had in life.
I have ZERO confidence SS will exist when I retire, that's why I am taking care of my own security and my own health. I hear you though, Any one of us could get hit by a beer truck tomorrow, and it sucks to say "I should have gone here or done this...."
I wouldnt put all my eggs in one basket. 401ks are not the end all, be all in retirement. Ank link in the system fails and all you have is numbers on papers.
Buy land ,they aint makin it anymore.
I heard that social security wouldn't exist when I retire 25 years ago. It wouldn't take much to tweak it so its works for the long term but politicians would rather use it as blunt weapon then fix it.
My plan for 25 years is to set myself so I don't need it and be pleasantly surprised if its still here.
My plan for 25 years is to set myself so I don't need it and be pleasantly surprised if its still here.
True, that is why you must continually adjust your 401K as you get older and move more of the $$ into safer investments as you close in on retirement age.
THe 401K itself is the one basket. THere are many other ways to save for retirement.
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