401k & Mortgage Interest

[Unregistered]

A client wants to buy new house. He had house # 1 that has been sold.

He wants to borrow against his 401k. So he will pay interest to himself. Can he deduct this interest on sch "A" as a mortgage interest?

[veritas]

No he can not. Loan is not secured against the home.

[jainen]

Yes, he can

Yes, he can, if the house is investment property. If it is rental or business property, he can deduct the interest on the appropriate schedule. If the house is a personal residence (which we can not assume from information in original post), non-qualified interest can't be deducted.

[Jan]

I would say NO

Can’t remember where I read this, but interest from your 401k cannot be deducted on Schedule A. Number 1, the money in the 401K is tax-deferred money, so how can you deduct interest on money you haven't paid taxes on. Just a question?

[Jan]

401k

After reading more on this, I agree with Veritas and Jainen C. that the interest would be deductible if secured by the home or if you could trace the interest to investment property.

Some information on borrowing from your 401K

Here are some things to consider before making that loan:


The money you borrow will only earn you the interest rate of your loan. For instance if your 401k is currently earning an annual rate of 6% and you borrow half of your account for a prime rate of 4% you will be losing interest on the money you borrowed along with any compounding interest.


Your contributions to your 401k are pre-tax but the payments you make to repay your loan are made after taxes.


If you leave your employer prior to paying off your loan you will be required to either pay the entire balance due immediately or the balance will be subject to taxes and penalties like a withdrawal.


The interest on your 401k loan normally is not tax deductible like a home equity loan or a mortgage.

As you can see borrowing from your 401k has implications that make it not the best loan alternative if you need some extra cash, regardless of your age or length of time before your retirement.

[Unregistered]

Thank you all for your help and time