Loan from 401K

[peggysioux]

T/P took loan against 401K to purchase rental property. There is no tax ramifications to this loan unless he fails to make payments on loan, which would then be considered a distribution. Is my line-of-thinking correct??

[Bird Legs]

401K Loan

You are correct. Did client set up a repayment plan for this?

[taxmandan]

Stay employed

If he leaves the employer, the balance of the loan must be paid back immediately or it will be a distribution and taxable also. I've had clients who didn't understand that and were shocked to learn of the tax and penalty when they changed employers.

[jainen]

deductible on Schedule E

>>There is no tax ramifications to this loan <<

Interest would be deductible on Schedule E.

[Gene V]

>>There is no tax ramifications to this loan <<

Interest would be deductible on Schedule E.

Are you sure? I look at it this way, the money in the 401K has not been taxes, and the earnings are tax deferred, so, when you take out a loan, you are paying back interest into your own 401K tax deferred account. I just never though you could deduct the interest-but maybe you could, because it’s not a tax-exempt account.
Will need your expert advise on this.

[BP.]

Refer to Pub 575, as there are situations where the 401(k) loan not treated as a distribution does not qualify for interest deduction.

[peggysioux]

lOAN FROM 401k

T/P is considering taking an early retirement in 2007. If he took an early retirement, would the loan have to be paid in full just as if he found new employement to avoid the tax and penalty?

[jainen]

Interesting point

>>Refer to Pub 575<<

Interesting point. I didn't know that.

[taxmandan]

T/P is considering taking an early retirement in 2007. If he took an early retirement, would the loan have to be paid in full just as if he found new employement to avoid the tax and penalty?

Yes, unless he returns the entire balance due on the date of retirement it will be considered a distribution and taxable and/or subject to early withdrawal penalty.

[Gene V]

Yes, unless he returns the entire balance due on the date of retirement it will be considered a distribution and taxable and/or subject to early withdrawal penalty.

If the TP is at least 55 upon retirement, he usually does not have to pay back all of the loan, he needs to check with his 401K plan.

[Jesse]

If the TP is at least 55 upon retirement, he usually does not have to pay back all of the loan, he needs to check with his 401K plan.

If this is the case he will still need to pay income tax on the distribution, but not the penalty.

[Gene V]

What I meant to say, he can continual to make loan payments without being taxes.

[KJ Judd]

Typically once you leave the employment of a company for what ever reason (leave, fire or retire) the 401k loan is due. You either pay it back or it is considered a distribution. You would need to confirm with the firm 401k plan document.

[Skate1968]

Stay Employed. If he leaves the employer, the balance of the loan must be paid back immediately or it will be a distribution and taxable also. I've had clients who didn't understand that and were shocked to learn of the tax and penalty when they changed employers.

I had a client who had the same problem. The investment company 1099ed him for a taxable 401k distribution from approximatly 9 years prior. Whats worse is that he had to stop working because he had been injured on his job. He had not filled out any 'personal hardship' paperwork that would have made the distribution tax free.

People at the bank said that authorities were tightening up on this-- calling for banks to enforce such laws.

[Luis Mopeo]

I had a client who had the same problem. The investment company 1099ed him for a taxable 401k distribution from approximatly 9 years prior. Whats worse is that he had to stop working because he had been injured on his job. He had not filled out any 'personal hardship' paperwork that would have made the distribution tax free.

People at the bank said that authorities were tightening up on this-- calling for banks to enforce such laws.

Where do you get the "tax free" distribution for hardship?