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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Re: 301K Loan Date: 11/10/2000 6:58 AM
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Greetings, Jo63, and welcome. You wrote:

<<I recently had to borrow $50K from my 401K for a real estate deal. I understand that the repayments are made to myself in the plan. Now I can no longer contribute to this plan because I don't work there anymore. So it seems to me that if I borrow money from myself and then pay it back with interest,this would provide a way of getting more money into the plan. Am I correct in this assumption? Is there any shortfall in this approach? >>

Generally, when you leave the employ of a firm and you have an outstanding loan with that firm's 401k plan, then the loan becomes immediately payable. Anything not repaid is declared in default, and called a "deemed distribution" by the IRS. That means the outstanding balance gets counted as income, gets taxed, and gets the 10% early withdrawal penalty if you're younger than age 59 1/2.

If you old plan is one of the very, very few that might allow you to continue loan repayments after you have left the job, then all you are doing is replacing money that was originally in the plan. You pay interest to yourself with after-tax money, but at retirement that interest will be called earnings within the plan, and that means you get to pay tax on that money again.

Are there shortfalls here? You will have to decide that for yourself.

Regards..Pixy
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