Can voluntary after-tax money be used for 401(k) loan?

[Guest Heather]

I know it is not logical to do this, but is there something that dictates that only pre-tax contributions can be accessed for the purposes of a 401(k) loan? If there is, what are the implications if loans have been granted & the after-tax money was included?

[Dave Baker]

Dunno of any reason why a plan can't earmark the loaned funds as being "from" (an investment of) a particular kind of moneys, if the plan already keeps separate subaccounts for that sort of thing.

Maybe one reason to earmark the loan as coming from pre-tax contributions is to get those dollars out of the plan (temporarily, in the form of a loan) without having to deal with the no-distribution-before-59-1/2-while-still-employed rule, and then withdraw the remaining funds under some other plan provision (e.g., hardship or an outright in-service withdrawal provision after 5 years of participation)?

If the loan goes into default and the plan sets off the unpaid amount against the account balance, I don't think an earmarking of the loan as coming from AFTER-tax contributions would mean the deemed distribution is a nontaxable return of basis, though. That would circumvent section 72's basis allocation rules on actual or deemed distributions.

[This message has been edited by Dave Baker (edited 05-01-99).]

[QDROphile]

If you have pre-TRA 86 after tax money and the proper plan provisions you can do all sorts of wonderful things with loans, including exceed the $50,000 limit. And perhaps that can be done to some extent with post TRA-86 after tax money.