Loan Amount

[WDIK]

The following excerpt is from some seminar materials I read. Has there been any official guidance on the topic?

An interesting planning opportunity is the use of a rollover from an IRA to a qualified plan, followed by a loan from the plan to the plan participant. An outright loan from the IRA to the IRA owner would be a prohibited transaction, but the liberalized rollover rules mean that even non-conduit IRA moneys rolled into a qualified plan should be capable of being loaned from the plan.

[Mary Kay Foss]

The provision that allows this was part of the EGTRRA changes in 2001. I've seen similar statements and it makes me a little nervous.

First, the Qualified Plan must accept IRAs. This would take a plan amendment after 2001.

Secondly,the Qualified Plan has to allow for loans. Not all of them do for smaller companies that had been S corporations or partnerships. It may take a plan amendment to allow for loans.

Third, the loan interest may not be deductible. If you compare this type of loan with a low rate equity line which is often deductible it may not be that attractive.

Finally, the Qualified Plan Regs treat loans as distributions when made unless all of the requirements are met. Many times it's just easier to take a distribution instead of dotting all the is and crossing all the ts for five years.

[WDIK]

Mary Kay,

Thanks for your reply. I understand your first two points, and they are not an issue as the situation in question has proceeded past those steps.

I do not follow your third point. What do you mean that the loan interest may not be deductible? Are you referring to the situation where the participant loan is tied to the purchase of a home, so that the interest is deductible to the participant? If so, that situation will not apply to this particiular scenario.

Your fourth point is duly noted, but the tax consequeses of taking a distribution can be prohibitive as well.

I guess the real question is, "Are rollovers from traditional IRA's into qualified plans included in the participant's vested benefit for purposes of calculating the maximum allowable loan?"

[mbozek]

Loan interest on an amount borrowed from a qualified plan is only deductible when the loan is secured by a mortgage on the taxpayers home and the loan amount is not attributable to elective contributions.

A rollover can be used for a loan if the plan permits such amounts to be used for a loan.

Also prototype sponsors now permit loans for owners as an EGTRRA amendment.