  This paper formulates and solves the optimal stopping problem for a loan made
to one's self from a tax-advantaged retirement account such as a 401(k),
403(b), or 457(b) plan. If the plan participant has access to an external asset
with a higher expected rate of return than the investment funds and indices
that are available within the retirement account, then he must decide how long
to wait before exercising the loan option. On the one hand, taking the loan
quickly will result in many years of exponential capital growth at the higher
(external) rate; on the other hand, if we wait to accumulate more funds in the
457(b), then we can make a larger deposit into the external asset (albeit for a
shorter period of time). I derive a variety of cutoff rules for optimal loan
control; in general, the investor must wait until he accumulates a certain
amount of money (measured in contribution-years) that depends on the disparate
yields, the loan parameters, and the date certain at which he will liquidate
the retirement account. Letting the horizon tend to infinity, the optimal
(horizon-free) policy gains in elegance, simplicity, and practical robustness
to different life outcomes. When asset prices and returns are stochastic, the
(continuous time) cutoff rule turns into a "wait region," whereby the mean of
terminal wealth is rising and the variance of terminal wealth is falling. After
his sojourn through the wait region is over, the participant finds himself on
the mean-variance frontier, at which point his subsequent behavior is a matter
of personal risk preference.
