401K Loan - How do you account for it?

Question

How would you typically figure in a loan from your 401K into your rate of return?

I wouldn't think you would calculate as debt service since the interest you are paying is to yourself but it does effect your available cash flow since you do need to pay yourself back.

Do you just treat is as a cash investment?

Chris Wosnitzer · Answer

Keith J. -- your not able to withdraw money out of a current employers 401k to roll into a SDIRA only after separation of service.    The employers plan documents also usually dictate what you can invest in as well, stocks bonds, mutual funds etc. and what mutual fund companies you can invest with as well.  If you have other 401ks at prior employers, or bank ira etc those can be rolled into a SDIRA.

My opinion is that your IRA/401K is not really yours until you take a withdrawal and pay the taxes!  It is a tax deferred account to be used sometime in the future.

If you borrow money from your IRA (even though it is your money) treat it like it is any other lender... It should always be a separate line item as debt service. YOU are not earning the interest YOUR IRA  IS...which is a tax deferred instrument.

if you do not pay it back you personally subjected to income tax on the distribution and possibly an IRS 10% early withdrawal penalty.

A loan from the 401k is a Debt/liability to your business/person and an asset/investment for your 401k.

Keep your 401k and your business separate If you keep that in mind it will also help you to in avoiding prohibited transactions once you open an SDIRA.

Just to confuse you some more you could take the loan from the 401k and use it for anything you like or even open a SDRoth!!

James H. · Answer

Technically speaking I agree with you Since you don't know what you will yield, it would only be hindsight. On the other hand, lets say you assume a 5 percent return on a 401K plan. Now also consider what your minimum acceptable return on RE investment is based on the risk and work involved. If it is 17 percent, you need to be okay with the fact that you are taking on more work and potentially more risk for a spread of 12 percent. Just my opinion.

David Beard · Answer

I disagree with Brian on this.  That is not a direct cost, only an opportunity cost.  You have this anytime you take some of your cash and invest it in asset A versus Asset B.

Steven Hamilton II · Answer

It is a long-term liability.

Chris Wosnitzer,

You cannot borrow from an SDIRA, although you can partner with one.

-Steven

James H. · Answer

Subract what you would have earned by leaving it in the fund.

Keith Jablonowski · Answer

Well, I have the money in the 401K already and still employed and they match up to a percentage, so don't want to give it up.  But do want to put what I can to use in my RE Investments.

Keith Jablonowski · Answer

Thanks for the replies.

@David,
Don't have one yet, considering it.  Just trying to cover all my bases before doing it.

Yes, it's negative cash flow, but the cash is flowing back to yourself not to a bank, assessor, etc.  Just trying to wrap my head around on where that would go on a balance sheet.

David Beard · Answer

Yes, I just treat it as a cash investment.  The loan and payback is just reshuffling money on your balance sheet.  The loan doesn't show up on your credit report and bank's don't count it in your debt ratio.

That said, the max 5-year amortization on a 401K loan makes for a steep payment that often creates negative cash flow in the household budget.  I'm paying back $940+ a month on a $50K loan right now, and that sucks all the cash flow from the associated rentals to pay it back.  I'm sure you're well aware of this, since you have one!

Chris Wosnitzer · Answer

I would calculate that as debt service...because if you do not pay it back you are subject to income tax on the distribution and possibly an IRS 10% early withdrawal penalty.  You are not earning the interest your IRA is...which is a tax deferred instrument.

Have you tried a Self Directed IRA...much easier and your IRA pays no taxes until you withdraw the money for personal use...unless its a Roth IRA than it may be tax free depending on your circumstances.

401K Loan - How do you account for it?

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