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Guest eanselm1

What is the maximum length of time a 401(k) loan can be taken for the

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Guest eanselm1

What is the maximum length of time a 401(k) loan can be taken for the purchase of a primary residence?

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Guest JimD

IRC 72(p)(2)(B) says that there is an exception to the 5 year repayment rule for home loans. No maximum repayment is mentioned. We suggest that the loan policy require no more than a 15 year repayment on home loans. I have seen policies that allow 30 year repayment. I think there is an arguement for a shorter time than a mortgage because the home loan is not usually a mortgage and certainly not a first mortgage which typically are 25-30 years. Also, as an employer how long do you want to have to administer the loan?

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Guest RJM

Can a Plan's Loan Policy restrict the term for residence loans to a variable based on the Participant's Age. For example, the lesser of 15 years or 70 minus the Participant's age on the date the loan request is made?

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Guest RJM

Kirk: Comfortable, no. But that's one reason I put it up for discussion.

Next question. Is it 'prudent' for a Plan Loan Administrator to make a plan loan to a 65 or 70 year old Participant?

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Guest JimD

RJM-I think its good practice to have the same rules apply to all. If a loan policy says all eligible participants can borrow then a 65 year old gets a loan. Have the loans due at termination and realistically how many 65 year olds are borrowing?

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Is it a good idea in any case? I don't think 401(k) loan interest is tax deductible, whether key or non-key, whether or not you secure the loan with the residence.

For the gallery, could you pledge your 401(k) account (up to applicable loan limits) as security for the mortgage, maybe allowing you to get a larger first, and getting to deduct the interest?

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A benefit from a qualified plan cannot be assigned or alienated or subject to any type of garnishment or levy. So pledging it as collateral for a loan would not work.

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Guest RJM

Chip: It is worst than you can imagine.

Assume your loan is treated as a directed investment (your loan repayments are credited directly to your plan account balance.)

You borrow $50,000 for 15 years @ 10% repaying with monthly payroll deductions. Total payback is over $96,000. That's $46,000 interest you pay from your pocket (after FICA and the other payroll deductions).

Guess how it comes out of the Plan? Tax-Free? No, sir. And if you're under 59-1/2, and don't roll your distribution over - you get to donate a possible additional 10% tax to the government coffers.

I suspect the IRS Revenue guys have a good laugh over this plan 'benefit'.

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RJM,

Well said! Explained this to a client, who went ahead with the loan anyway. The thought was that the way real estate was appreciating around Northern California, she could live in her new house for a couple years, sell and pocket a couple hundred K tax free.

(The house I bought four years ago would be way out of my price range today.)

Sorry, all for straying off-subject.

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Guest boberlander

Chip Brown indicates that he doesn't think a loan to a key or non-key employee is eligible for interest deduction. I attended a seminar last year where we were told that loans to non-key employees may be deductible if secured by a mortgage. We were also specifically told that key employees were not eligible for this deduction.

I didn't see any part of the thread raising the question of key or non-key, so I question what brought it up.

Of course, this is an income tax question, not a 401(k) plan question.

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Boberlander,

I distinguished 401(k) loans from other loans before saying key/non-key secured/non-secured. Check out Code Section 72(p)(3), especially subsection (B)(ii).

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Guest boberlander

72(p)(3)(B)(ii) deals with a loan that is secured by amounts attributable to elective deferrals. I do not think that this section supports the assertion that 401(k)loan interest is not tax deductible. Perhaps I misread your statement, or we are not discussing the same scenario.

To summarize this question: A loan is made from a 401(k) plan. That loan is not secured by your balance in the 401(k) plan. It is secured by a mortgage, presumably on your principal residence. You are a non-key employee. Can you take the mortgage interest deduction on your 1040? I still say that it is possible to do this.

Brian

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