Is there a tax penalty for taking a 401K loan and investing it into an IRA?
hockeyscott76 asked:
I am considering taking out a 401K loan to invest in an IRA in order to lower my adjusted gross income so that I may take the first home buyer tax credit that was introduced last month. Is there a tax penalty for doing this?
first home buyer loan
I am considering taking out a 401K loan to invest in an IRA in order to lower my adjusted gross income so that I may take the first home buyer tax credit that was introduced last month. Is there a tax penalty for doing this?
first home buyer loan
Tags: Adjusted Gross Income, First Home Buyer, Ira
December 27th, 2009 at 4:45 am
first home buyer loan
You probably can’t get a 401(k) loan for that purpose. There are restrictions on 401(k) loans. See your plan provisions, also.
December 29th, 2009 at 8:55 am
first home buyer loan
Only if the IRA stands for Irish Republican Army then not only will you have the Revenue service after you , Homeland Security will be showing up too.
December 31st, 2009 at 2:06 am
first home buyer loan
No can do.
If your income is too high to be eligible for the home buyer’s credit, then it’s also too high to deduct an IRA. If you are covered by a plan at work (the 401), you get no deduction if your AGI is more than $62,000 single or $103,000 married filing jointly.
Besides, the credit is subject to a phaseout as well as being an interest free loan that has to be paid back over the next 15 years (or when you move out of the house).
(Note, if the numbers had worked, yeah, you could get the loan to use as a downpayment to buy the house, then instead of using your savings as the downpayment, you would have used the savings to fund the IRA….the IRA rules merely require that you had enough earned income in the same year to be eligible to do the contribution, not that you actually stuck to a budget and spent that much less of your take home pay.)
January 1st, 2010 at 2:37 pm
first home buyer loan
Contributions to IRA that are made from borrowed funds are not tax deferred. You will not reduce your adjusted gross income.
Perhaps you can reduce down payment amount, or have seller pay part of settlement costs, in order to have funds available.
January 2nd, 2010 at 8:41 am
first home buyer loan
Won’t work.
The limits to make a deductible IRA contribution if you are covered by an IRA at work are lower than the first time home buyers credit limits. If you make to much for home buyers credit, you make to much for a deductible IRA contribution.
January 5th, 2010 at 7:43 am
first home buyer loan
Your AGI must be over $75,000 or you would be eligible for the home buyer credit. Unfortunately, that income is too high for you to make a deductible contribution to an IRA.
Could you change your 401k contributions and have enough additional contributed to reduce your income below $75,000? You might check with your plan to see if this is possible.
If you were allowed to borrow from your 401k, took the loan, and made an IRA contribution in the same year, there would not be a tax penalty for doing this. If your income qualified, you could get a deduction for the IRA contribution and reduce your AGI. But, this won’t help you qualify for the home buyer credit as explained above.
January 7th, 2010 at 1:11 pm
first home buyer loan
If you take a 401K loan and don’t pay it back as scheduled, it becomes a taxable withdrawal. If you are that close to being eligible, why not just contribute extra to your 401K? If you aren’t working there any more, you probably couldn’t get a loan against it anyway – you could take a withdrawal and roll it over into an IRA but that wouldn’t give you a deduction to affect your AGI. If you ARE still working there and already contributing to thre 401K you probably aren’t eligible for an IRA deduction.
You do realize that while it’s called a credit, it’s really a loan that you have to pay back over the next 15 years? You might be trying to go through a lot just to get a $7500 loan, even if it is interest free.
September 7th, 2010 at 10:24 pm
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