Should I Borrow From My 401K? Only If You Are A Petulant Fool

Cash Only RegisterYour 401k is for your retirement, you know, the time where you no longer work and need capital to support your life. By borrowing from your 401K, you are robbing your future self in the hopes of having a better life now. This is completely backwards thinking. Instead, you should be squirreling away your income now so that you can live a more comfortable life when you are less able.

Who is going to take care of you when you are old? The government? Doubtful. Your kids? Hahaha! Only you can rely on yourself. If all my wealth disappears now at age 35, I have the energy to find a new job, work on a new idea, and survive. If I have nothing at the age of 70, I’m screwed and will become a burden on society, thank you very much.

So many people who borrow or want to borrow from their 401K think they are smarter than they are. They argue that they’ve either found a better investment, or they just absolutely need to have that new car or house. This inability to delay gratification is one of the main reasons why we got into this economic mess in the first place!

Unless you have some serious type of life-threatening emergency and for some reason don’t have any savings, do not borrow from the 401K. Treat your 401K like a sacred hippopotamus. Let’s talk about various reasons why some borrow from their 401K.


“I’m good enough, I’m smart enough, and dog-gone it, people like me.” – Stuart Smalley, SNL

* To pay for medical emergencies. Hopefully with Obamacare, fewer people will get financially slaughtered due to unforeseen medical emergencies. Using your 401K to pay for medical emergencies is not a bad idea, provided that such expenses have high interest rates and could damage your credit if not paid.

* To buy a car. This could be the dumbest thing ever. If you cannot afford a car, do not buy a car. In the land of Internet and fantastic public transportation, if you are spending much more than 20% of your gross income on your car, you cannot afford it! Furthermore, if you do not have enough disposable cash lying around to pay in full, you likely can’t afford your car either. Considering spending the least amount of money on a depreciating asset.

* To buy a house. I’m not sure when we got this notion that we all deserve to be homeowners, but it is really wreaking havoc on people’s finances. If you cannot afford to put at least 20% down on your own and have another 10% buffer in cash, you probably do not deserve to buy a house. You are putting your neighbors and the entire economy at risk for buying an enormously expensive asset you can’t afford. If you default and go into a short-sale, you will immediately drag down the value of your neighbors even though they’ve always paid on time. There will always be houses for sale. Wait until you’ve got the capital.

* To invest. Although there are plenty of good enough options to invest within your 401K, some people can’t resist investing in the next good idea. The large majority of private equity/angel investments go nowhere. The large majority of great ideas that seem too good to be true, or exactly that. Unless you are a sophisticated investor with a fantastic investment track record, do not borrow from your 401K to invest in other things you don’t fully understand. Trust me, you are not Warren Buffett.

* To keep up with the Joneses. This is really one of the worst things you can do. Because your 27 year old friends own houses, even if you don’t have the capital, you are propelled to own a house yourself to keep up. You tell yourself that because you studied hard in school, are smart, think you’re good looking, and make $80,000 a year you deserve all the good things as someone older than you. Here’s how I deal with money envy.


* Teaches impatience. I firmly believe that doing anything successfully takes methodical planning and patience. Whether it’s starting a business, playing a sport, thriving in your career, or saving a nice nut for retirement, you need to have the fortitude to push on through when things don’t look so great. If you look at the chart below, those with $5,000-$9,900 have a much higher propensity to borrow from their 401Ks than every other account balance segment. It’s as if as soon as there’s a decent chunk of change, this segment feels a need to raid their account for something.

* Gives you a false sense of security. Don’t let your 401K be a crutch on your wealth building endeavors. If you always carry the mindset that you can borrow from your 401K, you might not try as hard to build income streams that are in your control. It’s easy to get lazy when we have a crutch. Big government allows us to not try as hard. Unions allow us to not fight as hard. The Federal Reserve allows us to not spend as carefully. Beware of moral hazard.

* Could create a double whammy. If you need to borrow money from your 401K, chances are you don’t have as much money in liquid savings to feel financially comfortable. If you end up losing your job, your 401K loan comes due immediately. If you so happen to spend your 401K to borrow more money (like get a mortgage), you are going to experience a world of financial hurt.

* Decreases your chances of wealth maximization. After creating a game plan for financial security, we must then hope for the best. The more we save and the more we do our research, chances are the more financial security we have. Being old and poor is no way to live. How many times have you heard 55 year old people in the news say they are devastated after a layoff? How can you be devastated if you’ve had 30 years to save and invest? Life happens all the time. Don’t expose your golden hippo to the chicaneries of life. The money in your 401K and IRA are protected in bankruptcy.

401K Study By Vanguard

Source: Vanguard April 2012 Report by Cynthia Pagliaro


Your 401K balance adds up over time. After 10 years of maxing out your contributions, your 401K will likely grow to over $200,000. You don’t have to be a genius investor at all. Company matches and compounded returns do the work for you! After 30 years of maximum contribution, there’s a great chance you’ll have more than $1 million dollars in your 401K alone!

Financial Samurai 401K Progress Guide

401k Balance By Age

If you raid your 401K because you think you deserve something before you should, you will put a stop to compounding, momentum, and wealth accumulation. I can promise you very few people who borrow from their 401K will be able to follow my 401K progress guide. If you have a 401K, treasure it by preserving it.

Be patient and wait your turn. Tell yourself you are nobody special, to prevent yourself from financial misfortune. You’ll be happier, and so will the rest of the economy!

Recommended Actions For Building Wealth

* Manage Your Finances In One Place: Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, where my spending is going every month, and how my net worth is progressing. Personal Capital is great for tracking your 401K balance and reducing portfolio fees. There is no better free online platform that has helped me grow my 401K to over $400,000 and outperform the market. It only takes a minute to sign up.

* Peer-to-Peer Lending As An Alternative: If you absolutely must borrow money, consider borrowing via peer-to-peer lending instead of your 401K for all the reasons we’ve discussed. Rates start as low as 6.59% and you can borrow up to $25,000 if you qualify for a variety of things including: consolidating your debt, medical, adoption, home improvement and more. Just make sure you borrow responsibility, and preferably for wealth increasing purposes. is based in my hometown of San Francisco and they are regulated by the SEC. You can borrow with here.

About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.

Updated on 2/10/2015

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

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  1. Benjamin says

    Housing is really a big one because it affects your neighbors who are innocent bystanders in your own financial undoing. It’s OK to hurt yourself financially given it’s a free world. Just don’t hurt others in the process.

  2. says

    I didn’t contribute as much as I should have when I first started working. I think I started out at a paltry 5% or so. I wish I could go back in time and increase my contributions! Or I can start lying about my age. Instead of being a mediocre 26 year old, I can be an excellent 24 year old!

  3. Brian says

    I think you missed the biggest drawback- that you have to pay back the loan with after tax money. I’ve heard people say “I’m paying myself the interest”, like they are some sort of genius and they’ve figured out the best way to borrow money.
    Also, if for some reason you lose your job, or decide to take a new job, you may have to repay the loan in full.

    • says

      Paying back the 401k loan with after-tax dollars is unimportant to the true cost of the loan. The loan is not taxed when distributed to you. So you should have to pay it back with post-tax dollars given that the original contribution was made with pre-tax dollars.

      Interest paid on the 401k loan is effectively paid back with after-tax dollars, so on net, a 401k loan is like any other loan ex-student loans and home loans. Basically, you only pay taxes on the interest. This myth drives me nuts; it’s one of those things that encourages people to make a sound decision in avoiding 401k loans but does nothing to interject truth into personal finance.

      That said, completely agree that 401k loans are a terrible source of financing for other reasons including the potential for immediate repayment upon job loss.

      • Shaun says

        If you were going to take a loan no matter what. I dont see how borrowing from yourself is a worse option than borrowing from a bank. Youll pay roughly the same or lower interest with the 401 and can set the terms of the loan and in many cases not forget your credit score. You were going to take the loan either way the only difference is whether you give the bank 5 percent or yourself.

        To those who say you lose the compounding interest. If at least a portion of your 401 isnt in low risk funds that prob dont return 5 percent then youre not trying. Putting the whole lump of your investment in the high risk funds all the time is how you end up hating yourself with the impending market crashes. Most years you will make out but there will come a day you drop most of your invesment if youre not watching it or rebalancing from time to time.

        So there are ways in which a 401k loan makes sense mathematically provided you dont lose your job as you are correct having to take that as an income deduction would probably result in you just dropping more cash from the account to pay the penalty.

  4. says

    You mean I shouldn’t borrow from my 401k even if it’s to put the money in a more stable investment like peer to peer lending? Kidding, of course. I might consider contributing less though in order to allow more money for other investments… If I am quite sure they will out-perform.

  5. says

    People in general would rather br satisified now than give something up now and be set for life later. The now part seems more certain. That said, I don’t agree.with it and I would never touch my 401k early.

    • says

      Great report, although Figure 1 just shows the median age of 43.9 is for the 246,259 defined contribution plans study, not the median age for those taking out a loan.

      Figure 4 shows that 12.9% of the 246,259 participants took out a loan, but it doesn’t say what the median age is of the 12.9%, just race. I added Figure 5 to the post, and it looks like age 55+ has the highest propensity to borrow sadly. So close, yet so far!!

    • says

      55+? That’s not good. Maybe they retired early and didn’t have a good plan and had to take a loan. I think the accumulated amount is probably too small when people are in their 20s and 30s to bother taking a loan out. It’s a bit sad. My 401k is closer to the low end than high end.

      • says

        I’m hoping that perhaps it’s because they have a very nice nut, that borrowing a little bit is no big deal. As we age, I think we feel more at risk of death logically. Hence, why not borrow a little just in case we can’t utilize 100% of our 401K by 59.5 penalty free.

  6. says

    Patience = wealth. Debt = impatience. Hopefully people do the basic math and realize THEY SHOULD NOT BUY STUFF THEY CANNOT AFFORD! And if you’re borrowing from you 401k, you cannot afford it.

    As far as injury goes, it’s really a case by case basis. Everything else is stupid.

    • greg says

      “As far as injury goes, it’s really a case by case basis.” – unless the unfortunate decided to forego insurance and demand others to foot the bill … in that case it’s another case of straightforward irresponsibility.

      Even if he/she has 10/20% co-insurance, most would be able to pay themselves for almost everything if they stop driving, eating out, flying around like a bird, etc. Basically, most people simply leech money because they don’t understand how to provide for themselves. Unfortunately this means that you and I are forced to pay up AND be responsible on top of it.

      • says

        I agree that insurance is a must, and I don’t like the idea of a leech. I was more talking about something that even insurance is maxed out on and you empty your savings to pay for. Example: I broke my neck and insurance only paid the first $100,000 of medical bills, and I had to cover the rest. Luckily, it wasn’t too much more, but I know procedures that cost a LOT more and have more involved (cancer) could max out insurance and cause them to choose between eating and paying their medical bills.

        That’s where I was coming from, but I do agree, those who borrow from 401k’s because of lack of proper financial planning are fools. FOOLS, I TELL YOU! :)

  7. says

    I am a fool who borrowed from my 403(b) plan. However, I borrowed 20k right before the market tanked and bought a for 20k in VT. I am selling it this year for 80k and it’s been rented since I purchased it for cash. I think I did ok while it would have otherwise tanked with the market.

  8. Larry says

    I don’t always agree with everything you say, Sam, but as someone who has just turned 64, I have my funds investing variously in a tax-deferred IRA, a Roth IRA, and a 401(k), and I have never withdrawn a dime from any of that money. But even if you don’t max out your 401(k), you can do pretty well by contributing even 10% of your income, and certainly enough to get whatever match your employer provides. My situation is somewhat different from your chart as I did not start working full time until age 29 as I was in grad school until then; also despite your disparaging claim — “Who is going to take care of you when you are old? The government? Doubtful” — I am not convinced social security is going away anytime soon, and I am likely at my age to benefit from it for the foreseeable future. (For the record: I fully support major entitlement reform so that succeeding generations can also benefit, even if that means some reduction in my own benefits.)

    The biggest problem with the 401(k) concerns the limited number of investment choices, the (often hidden) fees that cut into one’s returns and the lack of good investor education. Our 401(k) is with Fideltiy, and from time to time I sit in on 401(k) planning meetings. I see a number of people in my smallish company contributing all their investments either to mutual funds with high expense ratios or to the money market account with a .5 expense ratio that is earning .1 percent. Personally, I lobbied successfully for several of the Fidelity Spartan index funds, which are all I use for my 401(k) investments, and I try (not always successfully) to convince others to do the same.

    If you have unsatisfactory choices in your 401(k) offerings, a little known option once you hit 59.5 is to do an in-service rollover to a traditional IRA. This strategy is allowed by the IRA but may not be available with all 401(k)s, so do your homework, but it means you can put all your 401(k) money in the investments you want rather than what your employer wants, while your funds retain their tax-deferred status.

    • says


      Thanks for your perspective. I would be disappointed if my readers always agreed with me. Can’t learn much if so!

      If I was 64, I’d be bullish on SS as well. Unfortunately, I’m under 40 and expect best case 70% of what is owed if the retirement age stays the same.

      My chart includes years worked as well to incorporate folks who start contributing later. They are forward assumptions based of a 17k minimum max contribution.


      • Meredith says

        Which forces me to ask the question… where does life insurance come into play in all of this? For example, a cash-value whole life policy (that you can overfund in the initial years) would have a certain value that you can “borrow” up to 50% of in retirement and lower your effective rate of taxation in retirement. Then upon death, the remaining 50% is paid as part of the survivor benefits with no need to repay any value.

        Would you see something like this as an alternate investment vehicle for retirement versus say a Roth IRA for people who are over the income caps for that type of investment?

        • says

          It’s a reasonable option for those who’ve already maxed everything out and have extra disposable income.

          Term life is probably the cheapest and easiest way to go for most people. I’ve got little experience with whole life.

  9. says

    I’ve never even thought about withdrawing money from my 401k. I’d feel like I was hurting myself and there’s nothing I want or need that desperately anyway. If I was in a pinch I might reduce my monthly contributions temporarily but that’s about it.

  10. says

    that last point in your article is the one that is the most startling to me, and is the reason why companies are always more than happy to offer these 401k loans to their employees.. one company that i worked at actually advertised them on bulletin boards around the office..

    if you have an outstanding 401k loan, you are much less likely to up and leave the company.. the penalties are harsh for an early 401k deduction, and if you don’t have the cash on hand– you have no choice but to pay them.

    with that elephant in the room.. many folks just elect to stay at their current position until the loan is paid off, even if they are unhappy with their situation, or even if a better opportunity comes up elsewhere…

    • says

      Does stuff like this really happen? I can’t imagine a 401K loan as the reason why people stick in misery for longer than they should just so they have more time to pay it back.

      This to me sounds like a BIG problem and a negative death spiral.

  11. says

    You are right on the money, Sam! I think you can buy investment property with your roll over IRA account, and it is tax deferred as long as it is managed by a trust.

  12. says

    Borrowing from a 401k = bad news. Now, I think that if somebody has a medical emergency or something truly unforseen, that’s one thing. But raiding it to buy a house, buy goodies, keep up with the Joneses, etc….not smart at all in my opinion!

    The really crazy thing is, those people who do so are probably making better decisions than many others, in that they actually have money in a 401k in the first place.

    • says

      True. The importance of compartmentalizing our wealth can’t be said enough. Let individual segments of wealth building accounts grow. It’s crazy how much our 401Ks get after giving it a long enough period of time.

      I’d much rather borrow money elsewhere that via my 401K.

  13. says

    I disagree with a few points in here. Should people be deterred from borrowing from a 401(k) for a depreciating asset like a car? Of course. But if a better investment comes around, why not? The only realistic scenario I see where this occurs for most people is to invest in a rent producing investment property. Let’s take my example:

    – I borrowed 50K from my 401(k) to close on a set of college real estate properties
    – I’m paying back the loan over 5 years which is like 900/mo. the interest rate was 4.5%
    – There ARE NO FEES. And the interest gets paid back solely to me.

    Let’s say for years, I don’t even go cash flow positive (unlikely, but being real conservative here). Let’s also say the properties never increase in value. These are ridiculous assumptions, but just to show how much it makes sense, bear with me…

    Each year, I’m paying off 5K, 6K, 7K in principal (amortization improves each year of course). After like 8-9 years, IF the property never made any positive cash flow at all, and if it never even appreciated, then I’ve already made back my money. Everything after that is free money.

    Of course, we are just going cash flow positive now a year into the deal after some tenant issues last year upon purchase. And looking out 10 years, it would be hard to believe a property with year over year increasing rents has not appreciated in value.

    The math is pretty clear on this purchase at least – borrowing from the 401k was a great move – AND it diversified my assets out of stocks.

    • says

      This is exactly why I borrowed from my 401k to buy a house (which I will live in now and hope to turn into a rental property when I make my next move).

      Someone who suggests I keep 95% of my next worth in stocks/bonds instead of diversifying into real estate is dumb in my opinion.

      • says

        Why not contribute less to your 401K and use that money as a 20% down payment instead?

        Why not wait until you have the money to buy before buying?

        If 95% of your net worth is in stocks, is that so risky at your age? I’m assuming given the percentage, your net worth might not be that high compared to your income, so it’s not as risky as you think.

        • Darwin's Money says

          This is just where the money happened to be when the opportunity rolled around. I had $50K set aside in a different taxable trading account which could be liquidated, but which makes more sense? Trigger thousands of dollars in capital gains? Or simply take a loan from myself?

    • says

      You forgot several things:

      * How do you know your 401K won’t perform as well or better?
      * There is no free lunch. 50K for property is 50K less in stocks.
      * Property is fine, but it is not exactly an apples to apples comparison in terms of work involved. You’ve written a lot in the past about the college party ragers that have already occurred.

      My question is: If you wanted a rental property, why not use $50,000 from your liquid savings to buy it?

      • Darwin's Money says

        * How do you know your 401K won’t perform as well or better? –> You don’t. But why not diversify? You own real estate right? Why don’t you have all that initial investment in stocks? Same reason. Plus, my anticipated ROI is higher than the 6-7% I anticipate stocks returning over the next couple decades.

        * There is no free lunch. 50K for property is 50K less in stocks. –> ROI, diversification.

        * Property is fine, but it is not exactly an apples to apples comparison in terms of work involved. You’ve written a lot in the past about the college party ragers that have already occurred. –> true, up front it was a lot of work. Now, with a new group of tenants this year, things are much smoother and the property manager is handling most of the day to day. I’d trade off a higher ROI and diversification for a couple hours a month any time.

        • says

          I enjoy diversification, but I’m not borrowing money to borrow more money for real estate. I bought real estate through savings accumulated outside of my 401K and stock trading accounts. They are totally separate and is the crux of the argument. If you couldn’t afford to come up with 50K for the DP, and really want diversification into real estate, then just buy REITs or home builders.

  14. says

    I’m a petulant fool as charged. I’ve twice borrowed from the 401K to purchase rental property and paid all back in full. Once took 2 years in the down market and he second was three (or was that four) months.

    I won’t say that there is never a time when someone should borrow from the 401K. Sometimes the math makes sense.

    Now, if you are borrowing to buy a shiny new car, you should definitely be walking!

    • says

      But why not just wait until you have the money to buy? If it took you 3-4 months to pay back your 401K loan, why not just wait 3-4 months to buy the property? There are ALWAYS new properties that come around, especially in this market where you are.

  15. says

    I have a coworker who after 5 years of working does not have a 401K, Do you know what the crazy thing is he doesn”t even know if he should enroll in the plan. I told this person to do so immediately and I doubt they will listen to me. But you know what they mentioned towards the end of the conversation? How good the video game was the night before. Wasting money on video games when you do not have a 401K is immaturity to the max.

    • says

      That is ridiculous. Is this the reason why people are devastated to lose their jobs after 30 years? Seriously, if you save and invest for 30 straight years, you should have more than enough to hold yourself over for several years, especially with government assistance.

  16. says

    As soon as I reached the six-month mark at my current job I enrolled in the company retirement plan. It’s been a year since I did that and now I am planning to up my contributions by another 2%. Including company matching, that’ll put me at 16% total per year. Sadly, I am behind according to the chart unless I included my stocks too : (

  17. says

    Why can’t people be patient and accumulate enough capital before buying something?
    -> I think if someone doesn’t have a philosophy of preserving/accruing wealth, then it is that much easier to withdraw from the 401K. I know a guy who liquidated his account just because he thought the markets were going to hell and he does not like the economics of society in general (which is a much larger ball of wax)

    Pending more than we can afford is what caused the housing collapse in the first place. Why haven’t we learned from our mistakes? What am I missing here?
    -> I think it’s the whole “because I can” thing that causes the problem. If the option is there, then there will be those that take advantage of it. It’s getting something right now without thinking long term. I think 401Ks should be closed accounts that we contribute to and manage, but are not allowed to take any money out without severe penalty. If we think we will need money for other things, the don’t contribute as much to them.

    I’ll use the example of food. I just got back from a trip to Washington and spent most of it with a nasty stomach virus. Now normally, I have a hard time not overeating. Food is so good and plentiful here in the United States. But this virus compelled me NOT to eat. Eating was not an option. Consequently, I’ve lost 9 pounds. When there is no option to do it, it doesn’t happen I’ve found – at least for me.

  18. says

    People raid their 401k because they lack the discipline to save for the big ticket items. Medical emergencies I kind of understand, however.. If the medical emergency is that large where you need to take out a loan from your 401k to cover it .. for example 50k or so, then you should have insurance to cover you. Other than some weird medical thing… No excuse for taking money out the 401k

    • says

      Good point about if the medica emergency is that large, that insurance should cover it!

      There is co-insurance nowadays, which basically makes people pay a percentage of the total bill (usually around 20%). So, I guess a 50K bill would be $10K, and that would fit in the bill of borrowing from a 401K as some don’t have that lying around.

  19. says

    If the options in your 401k plan are crap, and you can borrow the money at Prime + 1% currently 4.25% and then invest the money in well diversified index ETF’s or Mutual funds then pay yourself back the loaned money and keep the interest you wind up ahead of them game, you have to have the assets to support the cash flow, also many plans don’t allow you to contribute while you have an outstanding loan, if that is the case and you can front load do so, if not it is better to contribute then try to invest the loan.

    I will post more details on this strategy on my blog this evening; I am not necessarily recommending it, just pointing it out as an option if you want to pump up your returns in your 401k.

    • Investor Junkie says

      My wife’s 403(b) is 3% APR for loans (fixed). I agree for the possible situation you describe. If your company’s 401(k)/403(b) options stink this might be a option to help with your returns. This assumes the company does matching of course. If they do not, then you are best to just not use their retirement options and invest in taxable accounts. You should NEVER pass up company matching!

      • Jay @ effumoney says

        Sorry I didn’t get to write my post last night, I got home later then I expected but it is up now, I go through the basic math to show how you can wind up with larger account balances both in a 401k and your taxable accounts.

        Here is the link if you are interested.

        @Investor Junkie – I would still max out a 401k/403b even if there is no match, the tax deferal is an automatic return of 10%/15%/25%/28%/33%/35% depending on your tax bracket not to mention state taxes as well.

  20. DFWJoel says

    The amounts that can be added into a 401(k) are limited each year. Once the year is over so is your opportunity to add that amount. Instead of putting cash for a house down payment into a taxable account, why not contribute that to a 401(k) if you weren’t going to be able to max out the 401(k) anyway? That way, when you’re repaying the loan, it won’t be counted against your current year’s amount.

    Of course, there’s always the risk of losing your job, which would require a quick payback.

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