Participant Loans

The True Path to Total Financial Freedom              

Power Chapter

Deadly Distributions vs. Lovely Loans

A gentleman wrote in to USA Today asking if he should take a dIstribution or sell an investment property to pay off another property.  No where in the answer did the commentator suggest converting his IRAs to 401Ks to provide PARTICIPANT loans to pay off debt on a rental property.  If he took a $100,000 distribution to pay off his debt, the investor would pay between $25,000 and $28,000 in taxes.  He would pay between $35,000 to $38,000 if he were younger than 59 1/2. 

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Coming Attractions
Coming Attractions

Distributions 


The only option to get personal use of your retirement money in Roth or Traditional IRA is to take distributions.  Yes, there is a 60 day rollover, but that's really a distribution until you prove that it's not.  And you have 60 days to do it.  Too many people have tried to use their money for short term investments, only to run afoul of this stringent requirement.  One day late, and you have a taxable distribution and if your not 59 1/2, you have penalties as well.

Loans, not Distributions


If you take a loan from your 401K, you don't have to worry about 60 days.  You have up to five years to pay your loan back.  If you use the money to purchase your own home, you have up to 15 years.  But even better, you can use these loans for business purposes.  If the gentlemen in the article was under 59 1/2, and took the distributions from his and his wife's IRA, he would pay $35,000 out of the $100,000 he needed.  He would only have $65,000 to pay off his $100,000 debt, which would leave $35,000 still outstanding, needing to be paid off through earnings.

The BEST of All Worlds


His $100,000 from his and his spouse's TA 401K could be paid back over five years.  His payments would be $1,864.30 per month at 4.5% APR, and he would be paying this back to his and his wife's TA 401K (not to the bank, but to themselves)!  Now this is the fantastic part!

They get to deduct the interest!

That's right!  Since they're using their loan on a rental property (a business), the loan is properly a business deduction. Thus their TA 401K is growing by 4.50% per year, yet they get to deduct every cent of interest off their income tax!