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I'm age 64 & considering making a short term personal loan with interest to a tax-exempt organization. The loan would be payable in total with interest in two years or upon organization's sale of land, whichever occurs first. Funds would be sourced from my retirement investment account. I'm retired now & the loan will not jeopardize my portfolio.

  1. Would I be taxed at my personal income tax rate upon withdrawal of the funds for this loan from my professionally managed, balanced 401k (not Roth funds)? My investment institution offers a gifting account but I'm not sure a transfer to this account would result in an exemption on personal income tax on the loan funds.

  2. If taxable, this would move me to the next higher tax bracket.

  3. Whether or not taxable when pulling funds out of the investment account, when I'm repaid, do I owe Federal tax only on the interest income portion of repayment funds or on the lump sum & interest received (all of which which would return to my retirement account in lump)?

I realize that I would not be eligible to take a federal tax deduction unless I "contribute" the money and I believe the maximum annual deductible contribution is 50% of my annual AGI so if I go this route it matters whether or not the balance is considered personal income.

Thanks.

  • You need to ask your 401k plan administrator if you are even eligible to take a loan from the plan. Usually, loans from 401k plans are made to current employees, and have to be repaid as specified by the plan (monthly installment payments are usually required) together with interest. The entire loan becomes due upon separation from service (or within 60 or 90 days), but, as a retiree, you are already separated from service. So, you need to check if you, as a retiree, can take a loan from the 401k plam, – Dilip Sarwate Sep 25 '14 at 2:45
  • @DilipSarwate he is not taking a loan, he's giving a loan. – littleadv Sep 25 '14 at 3:03
  • @littleadv Since the OP is talking about returning the loan amount to the 401k plan, he is thinking about taking a loan from the 401k plan and loaning the proceeds to the tax-exempt organization. Then, when the organization pays the loan back, the OP in turn pays off the loan from the 401k. This can be done by an employee, but a retiree? – Dilip Sarwate Sep 25 '14 at 3:11
  • @DilipSarwate I don't think that's what the OP is thinking. I think the OP believes he can take money from 401k and then put it back as he needs. – littleadv Sep 25 '14 at 5:39
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Would I be taxed at my personal income tax rate upon withdrawal of the funds for this loan from my professionally managed, balanced 401k (not Roth funds)?

Yes. This is a regular distribution. Why wouldn't you be taxed? What's gifting has to do with anything?

If taxable, this would move me to the next higher tax bracket.

Depending on your other income - it may, or may not.

Whether or not taxable when pulling funds out of the investment account, when I'm repaid, do I owe Federal tax only on the interest income portion of repayment funds or on the lump sum & interest received (all of which which would return to my retirement account in lump)?

Only interest.

And you will not return it to your retirement account. Not in a lump and not in installments and not in any other way.

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