Does the loan interest repaid to a 401K increase the basis of the 401K since the interest paid to your account is actually after tax income?

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Originally Posted by goofyphd

Does the loan interest repaid to a 401K increase the basis of the 401K since the interest paid to your account is actually after tax income?

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Generally 401k contributions are not included in taxable income. As such no basis. Interest paid on loan is required by regulation without indicating a factor for basis.

Hello Delite

In light of your response, here is some additional background: When I began repaying my 401K loan (1980's), interest was a deductable expense. While at that time I could certainly not claim both an interest deduction and an increase in the 401K basis, the interest-deductability rules changed over the years. Therefore, I actually kept detailed records of both deductable and nondeductable interest over the life of the loan(s). Did the IRS not consider this or did they make the rules to cover both scenarios?

By the way, I have never seen an comparison of "401K loans vs other ways of raising cash" that considers this tax consequence.

Goofyphd

During the time frame when interest was deductible you should have deducted said interest if indeed it was deductible since in essence you paid interest to yourself. I doubt it was deductible and there is no option to create a basis for a 401k plan.

I agree with Delite.

If you deducted the interest on a 401K loan, you got away with an invalid deduction.

There is NO basis for your 401K, as the distributions are taxed as normal income, NOT capital gains.

Hello ATE

Are you sure?

Even back when interest on credit cards was deductable? Seems to me I was deducting the interest on my 401K loan back in the early eighty's. I recall that this deductability was phased away over several years, and, of course, today we could not take this deduction.

Thanks for your input.

Goofyphd

You are correct. There was a time when credit card interest was a deductible expense, and the interest on a 401K loan was considered deductible. However, that has no bearing on your 401K. Even though you are essentially paying the interest to yourself, the two things are totally separate. The interest you paid is considering income earned by the 401K just like other income paid into the plan. It doesn't matter WHERE the income came from. ALL the income earned by the plan is then taxed on distribution as normal income.

The impact of the tax deductibility of the interest was confined to the tax year you claimed it. And has no bearing after that.

Thanks to all for the input. First time I've used this forum, and I was quite pleased.

Goofyphd

Scott explained it best.

Glad to help!