401(k) Loan - Borrow PRE or POST tax money?

[John Olsen]

If a 401(k) participant needs to borrow money from the plan, and may choose whether to borrow either deductible or nondeductible money, which would be the better choice?

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

[bzorc]

My first look would be at the plan document. Many documents I worked with listed the order of accounts where loans would be taken from.

If the document is silent, I would probably start with after-tax dollars. If the participant terminates and "defaults" on the loan balance, at least the default has already been taxed at the personal level.

Hope this helps.

[IRC401]

IMHO the plan SHOULD REQUIRE that he borrow first against after-tax money so that if there is a default there can be a distribution rather than a deemed distribution.

[QDROphile]

One nice advantage of after tax money is that you can borrow more than the maximum allowed under section 72(t), if you think that borrowing is nice.