401k loan payback post tax

Forum|Forum|7 years ago
June 1, 2019
4 replies
23 views

We took out a 401k loan and my husband lost his job. We are now making payments back but funds are coming out post tax and going back into the account. Since the funds do not come out pretax is what we have paid back deductable? How?

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myrna1901Author

Level 2

when we were paying it back when he worked there, the money came out pre tax as a 401k loan. Now it comes out after we pay tax. I know we borrowed the money but we borrowed it from a 401k and now I am paying it back with money I paid taxes on 😞

macuser_22

Alumni - Champ

The money in the 401(k) is pre-tax. If you borrow a dollar of that pre-tax money you get a dollar of pre-tax money. You must repay that dollar and do not get to deduct it a second time, since you did not pay the tax on that dollar when you borrowed the dollar.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

macuser_22

Alumni - Champ

No. Repaying a loan is not a contribution and is not deductible - it is paying back borrowed money.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

dmertz

Level 15

myrna1901, you have fallen prey to a common misconception. You aren't paying the loan back with money you already paid taxes on. You are effectively paying it back with the money that you were loaned, money on which you have not yet paid any taxes. The fact that you moved money around outside your 401(k) while the loan was outstanding is irrelevant. Money is fungible.

With regard to this loan, the only part that you are paying into the 401(k) that comes from money on which you have already paid taxes is the amount that you pay in interest on the 401(k) loan. However, interest paid on personal loans is not deductible. Further, the loan interest that your 401(k) receives from you is simply a return on an investment held by your 401(k) (that investment being the loan to you that your 401(k) holds). It does not become after-tax basis in your 401(k).