All Forum Posts by: Glen Sonnenberg

Regardless of the 401k considerations, I'm not sure I understand your math. If you need to get your loan balance down to $128,700, you could simply calculate how many principle payments you need to make (from an amortization schedule) such that when you reach the 60th month payment your balance is $128,700 and make a principle payment now from your 401k. It should be much smaller than $21k since as you move through the payment schedule the principle portion of your loan payment grows. So, putting an extra $10k now (as an example) would mean that your loan balance decreases faster from here on out to get you to the magic 78%. Also, I believe the 78% is based on the loan to value of the house so although you may be required to pay for 60 months you may reach that % (or not) through the potential increase (or decrease) in value of the house during that five years. That may depend on your loan though.

Yeah, if you are investing within a tax-deferred/sheltered account then the money has to be kept inside it. There are also potential problems if the money reserves inside the account can't cover operating expenses. If you are looking to do this as a source of employment then it probably shouldn't be done inside these accounts. They are for long-term savings for retirement.

Jeff Brown (The Bawldguy) is a big advocate of cashing out your 401k and investing in real estate. However, for various reasons regarding restrictions about buying real estate inside a retirement account, he suggests purchasing discounted notes inside these accounts and using other funds outside to purchase property. He explains a lot about his philosophy on his website (bawldguy.com). I don't always agree with him on cashing out your account but he definitely has a proven track record which supports his investment advice. Worth checking out.

Glen

Ok. I think this is kind of an "authoritative" answer. It looks like it's probably not allowed in most cases. I hope John's deduction is allowed but most likely it is not.

http://www.fool.com/personal-finance/taxes/2005/07/01/retirement-loans-is-the-interest-deductible.aspx

Here's the relevant sections.

Qualifying retirement plans
Before we get too far, let's make sure that we're all talking about the same thing. Remember that there are no provisions to borrow against your IRA (either traditional or Roth), SEP, Keogh, or SIMPLE plan. What we're talking about here are qualified retirement plan loans, such as against your pension plan, a 401(k), or a 403(b) plan.

With some very important exceptions, interest paid on a retirement plan loan must be "traced" in order to determine the use of the funds. If the funds are used for personal purposes, then the interest is generally not deductible. But if the proceeds are used for qualified residence, education, business, or investment purposes, and you can trace the proceeds of the loan for such purposes, then you would likely have an interest deduction based upon those provisions of the laws.

Seems simple so far. But as with most tax laws, what seems simple on first blush normally isn't simple at all.

Exceptions for 401(k) and 403(b) plan loans
The law says that interest paid on a loan secured by your account balance is nondeductible if any of the account balance used to secure the loan is attributable to elective deferrals that you made. Well, heck, that's why you signed up for a 401(k) or 403(b) plan -- to elect to defer part of your wages into the plan. So it's easy to see that this exception virtually prohibits an interest deduction for interest that you pay on loans against your 401(k) or 403(b) plan. It's possible that the vested balance in your account is totally from non-elective employer contributions, but extremely unlikely. So generally, interest that you pay on your 401(k) or 403(b) loan is nondeductible -- regardless of how the loan funds were originally used.

Here's another link which says it's not deductible regardless of the use of the funds. It's still possible that one can deduct the interest against the income from a rental property but given that you're in effect self-dealing it doesn't sound like that's possible. I'd still like to know if anyone else has any experience with this.

http://www.ehow.com/info_8345483_mortgage-interest-paid-401k-taxdeductible.html

401k Loan Interest Deductibility

• Certain types of mortgage interest may be tax-deductible. However, a 401k loan is not considered a mortgage because such loans do not use the home as collateral.The 401k loan interest is not deductible as mortgage interest for this reason. The interest on all 401k loans is not deductible on income taxes regardless of what the loan proceeds are used for.

Given that I just did a 401k loan earlier this year to purchase a rental property I would like to get a definitive answer. I know tax laws aren't always intuitive but I doubt that if I did a transfer (aka loan) from one of my accounts (outside of a 401k) to another that I could then deduct the interest I was paying myself. It doesn't seem logical that it would be allowed simply because the funds came from a tax-deferred investment account. It's possible but it sounds like a potential problem down the road. Any tax experts out there know for sure?

Glen

John,

You might want to confirm that with a tax accountant/attorney. It sounded fishy to me that you could deduct the interest you paid yourself from a 401k. Did some searching and found this.

http://helpdesk.blogs.money.cnn.com/2012/12/14/deduct-interest-on-401k-loan-to-business/

It's a little dated but I'd do some more checking just to be sure.

Glen

So, I misread the article and thought that it was referring to Solar City. It's First Solar who is supporting APS. Sorry for the mistake. :) Regardless, I still think solar is a good idea and will post how it turns out for me.

Peter: I include utilities in my rent so going solar will help a couple things. First, it will reduce my electric bills. Second, it will increase the value of the house. Lastly, in effect, solar turns a variable cost (electricity) into a fixed cost which I'm paying up front.

For those of you interested in going solar in Arizona, I found this article which you might consider. I used Solar City and just sent them a rather nasty email regarding their support of APS in trying to change the NetMetering rules. So, far they have been reasonably easy to work with but if they are working against my interests at the same time as they are selling me a system based on certain financial assumptions (which they appear to want changed) I think that's a little sleazy and very annoying.

http://finance.yahoo.com/news/solar-vs-solar-utility-targets-210000420.html

Glen

One other thing, I was doing some research and there are systems (mainly available in Germany) which include battery backups such that you could install the system and remove yourself completely from the grid. However, due to the increased need for production to cover nighttime the systems need about twice the production capacity and end up costing about twice as much as a system which is tied into the grid as a "backup" to the solar. Someday this might work but for now it doesn't appear to make sense for most people.