Don’t know what a B.O.Y. is…don’t feel bad. Many of you do not know what a B.O.Y. is and many of you do. For those who do understand B.O.Y., you may be wondering why a post on self-directed 401Ks would also be talking about B.O.Y. (hereinafter referred to as just BOY)? Good question as sometimes the basic tenets of a BOY plan is to dump your 401K plan….well at least a traditional 401K plan that holds stocks, bonds and mutual funds only.
So, what is a BOY and why are we speaking about a Mini Boy? Well, in layman’s terms, BOY refers to Bank On Yourself and is a strategy that emphasizes purchasing a specific type of life insurance policy that is overfunded to achieve, over time, higher cash values within the policy. The owner of the policy has a smaller death benefit, but is using premiums paid to grow the cash value of the policy as much as legally permitted. Then the intent is to take out policy loans from the plan to pay for major purchases, etc. with the loan repayment being returned to the plan with interest. The concept is using your own money to purchase “things” you want and repaying the loan principal with interest back to yourself plan as compared to a credit card company or other financial institution.
Please Note: This post does NOT take any position on whether a BOY strategy is either good, bad or indifferent. Nor does this post take a position on whether purchasing life insurance as an investment vehicle…generally viewed with skepticism by mainstream financial “experts”…is equally beneficial or not.
However, there is a very simple concept that BOY preaches that can be equally applied to one’s 401K plan and should be considered by many in reducing debt while growing the assets of their plan at the same time. All you really need is your self-directed 401K plan, some debt you want to eliminate or purchases you want to make, and the ability to repay loan principal and interest.
So, what is the strategy?
Well, I promised I wasn’t going to make or provide any commentary on the value of the BOY plan….and, I am sticking to that….but, as mentioned, the BOY concept preaches taking policy loans from a specific life insurance policy that has been purchased which increases cash value. In increasing the cash value, you are encouraged to make major purchases that you want by using the cash value from the policy and repaying these purchases (principal) back to your plan with interest. Easy of enough of a concept when you think about it. The benefit, in its simplest of all terms, is instead of paying back a loan/credit card company, etc. for these purchases/debt reduction activities, why not pay back the loan to your plan and grow the value of your plan at the same time. The ole why pay someone else for their money when you can pay yourself back with YOUR money.
Well, this isn’t a difficult concept to grasp onto, but if you can do this type of activity within the confines of a life insurance policy, you can certainly do this same type of strategy within your 401K. Obviously, IRS rules must always be followed and adhered to related to loans from a 401K, but if one qualifies for a self-directed 401K, they are permitted to exercise loans from the plan and these loans can be used for any reason whatsoever.
Remember I mentioned IRS rules. Well, the basic ones are that you cannot have a loan that exceeds 50% of the account balance or $50,000, whichever is less. Also, you have a maximum 5 year repayment schedule with quarterly amortized repayment schedule that must be adhered to and you must pay a legitimate interest rate. Further, you cannot have more than one outstanding loan at any one time. But, who are you paying back? Well, technically, your plan, but who is your plan? That’s right….you.
So, as we can see, the concept between the BOY program and the 401K loan provisions is similar in concept….thus, the name Mini BOY. The BOY plan uses life insurance and the Mini BOY uses the 401K in a permissible manner.
Now, without going into math calculations….it’s too early for that….let’s keep the concept simple and also use a REAL PERSON who utilizes this strategy with his 401K plan. You will see that as long as you can re-pay the loan and interest (to yourself) there is great power and simplicity to this concept in reducing your debt and making major purchases….all the while increasing the value of YOUR 401K plan.
Let’s use James. He is 47 years old and lives in North Carolina. Let’s examine how using this simple concept benefitted him and his 401K plan. Please remember for this type of strategy to work, one must have employment earnings which provides the individual the ability to pay the loan principal and interest back to the 401K plan.
James had a credit card with a debt of approximately $10,000 and 12% interest. Like most Americans (unfortunately), he was pretty much paying the “minimum” payment amount on his credit card each month. Well, all of us are smart enough to know that if we do that, the debt continues and continues to build and we end up being chained to the debt….for what may be forever. Sound familiar?!
With the Mini BOY concept, James (who had a self-directed 401K balance of $131,000) was permitted to take a loan of up to $50,000. What James chose to do was to take a loan for the payoff amount (10K) and repay the loan back at 10% interest. What he did immediately was payoff his credit card debt to get that monkey off his back. Let’s face it, what otherwise would have been a debt that he most likely would have kept for years and paying huge finance fees along the way….he now had eliminated.
While paying off his credit card was a great removal of this cumbersome financial barrier, where James equally benefitted was that he was now paying back the principal and interest to his 401K plan….and with a good return (10%). He was truly benefitting by removing debt AND having an effective strategy to increase the value of his 401K. Oh, and while sad to say, in current economic times, might this in some ways be considered a good investment? Sure….when you consider that with what has happened in the market, he may not have had a 10% return on his money and he certainly could have lost 30 – 40% of the value of this money.
But, here is where the “miracle” happened….and you may not think this happens until you do this yourself. You see, we all know how easy it is to get in that financial rut and pay back the “minimum” amount on debt we accumulate, right? The cycle just continues and usually spirals out of control for many. The “miracle” for James was that since HE was now holding the debt through his 401K plan, he formulated a detailed plan to pay off his loan with 10% interest in two (2) years. You see, he got so excited about putting the interest back in his retirement account and the ability to make a loan for the next debt payment/purchase, that he executed a repayment schedule to repay the debt sooner rather than later. It’s a simple concept of taking responsibility for YOU. No one else will do it.
But it did get better for James. Instead of taking two years, he is now approaching having the loan paid off in full in 18 months. He has already called me to tell me that he is going to be taking out another loan for his wife’s credit card, which has a debt of about $8,000 at 14% interest. Again, he will get rid of debt to a credit card company and the feeling of being enslaved to such debt. He will transform into that new feeling of paying off debt while INCREASING the value of his 401K plan.
Can we do this for most debt or purchases. Yes. Obviously, one needs to follow all IRS regulations in the establishment of the loan from the 401K and repayment schedule and terms….but, the benefit to you is available and permitted. Is there not a better feeling than no longer owing and paying more money to a credit card company while at the same time increasing the value of your 401K plan?! And, don’t lose sight of the fact that the 401K plan may be making a better return off the loan it has executed with you than it may have made in the market.
Self-directed 401K plans offer individuals the flexibility and freedom to invest in assets they wish to invest in as long as they follow all IRS rules. This is just a brief example that as part of your investment strategy, the permitted use of loans to reduce or payoff debt may be worth considering. You have to decide if this kind of a tool is of benefit to you…but isn’t it nice to know you have options?!
