Will the loan count as taxable income and will I have to pay taxes on it at the end of the year? Any other considerations about taking 401K loans? It seems like a decent deal since you borrow your own money and pay yourself back the interest.
2007-02-08 15:33:17 · 4 answers · asked by whitney 1 in Business & Finance ➔ Personal Finance
Ok, here's the deal on a loan.
1) it's not taxable. However, if you fail to follow the terms of the loan it will become taxable. Terms basically mean paying it back according to the amortization schedule. And, most companies also add in the requirement that payments be made via payroll deductions and/or payment is immediately due and payable upon separation from service.
2) considerations to consider? Main one is effect on retirement savings. If your interest rate is lower than what your regular assets earned over the course of the year then you are doing long term damage to your retirement account. It's not as significant as a distribution but it's not meaningless either. Compounding effect of income earned is huge over 30 years.
Also, if you leave your job you will be required to pay it all back within the end of the quarter following the quarter that you miss your first payment. IE miss a payment in Feb, you'll have to pay it off by June 30 or it's in default and taxable. So, you'll either have to pay it back by then or convince your new employer to allow for a rollover of the loan. It's legal to do but most don't allow it either out of ignorance or desire to avoid loans altogether.
3) It's a common misunderstanding that you are borrowing your own money. The PLAN is lending you money and using YOUR money as collateral. Yes, the interest income goes to your account but it's the only way to prevent it from being taxable. That's also why the payments made are after tax. You are not being double taxed on it any more than you would be double taxed on a consumer loan. There really is no difference...you just are more connected to the source of the funds.
2007-02-09 04:52:44 · answer #1 · answered by digdowndeepnseattle 6 · 0⤊ 0⤋
No, it won't be taxed.
But if you leave the company before you pay off the loan, you can have a tax problem. If the company makes you rollover the 401k, you have to either take the tax hit, or pay the loan back right away (which could be difficult if you were just laid-off).
2007-02-09 01:59:02 · answer #2 · answered by Quixotic 3 · 1⤊ 0⤋
No the money is not income for tax purposes.
Make sure the loan is paid back timely or else you wind up shooting yourself in the foot come retirement time.
Otherwise it is pretty straight forward.
2007-02-08 15:50:44 · answer #3 · answered by BD in NM 6 · 2⤊ 0⤋
Since it wasn't taxed when you put it into your 401K, it will be taxed as regular income when you take out the loan. Also, you'll have to pay a 10% penalty for the withdrawal. The money you take out will not grow, which is very important over time. I wouldn't recommend it. I didn't do it when I needed it and I'm glad I didn't. I retired at 55.
2007-02-08 15:50:42 · answer #4 · answered by Anonymous · 0⤊ 4⤋
No; no type of loan is ever taxed as income, with the exception of a life insurance policy loan under very specific circumstances. Apparently, "Idaho" ain't da man.
2007-02-08 16:01:32 · answer #5 · answered by Rob D 5 · 0⤊ 1⤋