401k Loan
Hello everyone,
I just want to say first of all you guys are really masters at your craft and I admire and thank you sharing your knowledge. My question is concerning a 401k loan. My question is actually 2:
1. If someone takes out a loan on their 401k, and they have their payroll dept. automatically debit their payroll check to repay the loan, are the monies used to repay the loan pretaxed or after tax?
2. If the moneies used to repay the load is after tax, whenever they qualify for a LSD and decide to w/draw funds, will they be paying income taxes on that money again?
Thanks for your reply in advance.
Joel
Permalink Submitted by mk foss on Thu, 2009-02-12 19:14
Repayment of a retirement plan loan comes from after tax dollars and the interest is not deductible.
A retirement plan loan is an asset of the plan and must be paid back. It will be taxable when you take a lump sum distribution at retirement. You need to think of it as any other kind of investment, if the plan loaned money to a finance company for example, you would expect that it would be paid back and would be taxable when you withdraw at separation from service.
If the loan went into default and you paid tax on it, you still must pay it back – but in that case, you would have some basis when you have a lump sum distribution.
Permalink Submitted by Alan Spross on Thu, 2009-02-12 21:23
The issue of double taxation is frequently raised on plan loan repayments.
The bottom line is that the principal is only taxed once, but the interest is taxed twice, so double taxation only applies to the interest. Interest is paid back with after tax funds, but is taxed again at the time of plan distributions.