Stock and mutual fund question?

Question

What is the downfall to this idea?

If I took out a loan from my 401k for 10k when the market is up 18% from the beginning of the year, and put the money back in when it goes down to -10 percent from the beginning of the year, would that be a good idea? Would I make money? I can take out a loan at 5.5% interest and all of the interest is paid back to my account. In other words, Im taking a loan from myself and paying the interest back to myself. There are no taxes or other fees other then a $125 fee to get the money. It comes out of my check on a weekly bases on a 5 year repayment plan and can be paid in full at anytime. Is this a good idea? People keep telling me its a bad idea, but nobody can explain why. The whole time I would still be contrubuting 9 percent of my check into the plan. Some one explain why this is a bad idea please, because it seems so simple.

Answer 1

. Here is the problem with your theory: In the past 10 years, the S & P yielded 2.5%. That is basically flat for the decade. So, it will only work if you can guarantee that you will make the % you need ( the 18%). Now, you can make that, and better, but that requires really active trading.  Here is the other thing you didn't consider:

When you take the money out of your IRA, and put it into a brokerage account, you will have to pay capital gains on your investments, (assuming you don't lose the money-and make profits.) So, you are taking a nontaxable amount that is already invested and making it taxable and subject to capital gains ( could be long term or short term, depending on how long you held the securities).  The real beauty of your 401K is the tax deferral. Better to leave it in your 401K...