Borrowing from 401K to max it out

[hcj]

We refinanced the house twice last year with FHA loans and paid quite a bit of upfront mortgage insurance. However, our income is too high to deduct it and we are not able to take all of the "loss" on the rental property.

I was planning on putting approximately $15K into my indvidual 401K this year. If I could put $46K in then the tax liability is approximately $15K less because it gets our AGI down to where we can deduct the MI and the full rental loss. The problem is I don't have $46K. I have $28K for taxes and funding individual 401K and even that is tight.

I can borrow against my 401K. Because this is an individual 401K I don't have to worry about the possibility of having to suddenly pay the balance back, so that's not a concern. So I'm seriously thinking about making a $25K contribution and taking a $25K loan and then deposit $21K into the account and pay off my car. I don't want the car payment AND the 401K loan payment.

So, would you do that to save $15K in taxes this year or just pay the bigger than expected tax liability and make less of a 401K contribution than planned?

[phil5185]

If I could put $46K in then the tax liability is approximately $15K less because it gets our AGI down to where we can deduct the MI and the full rental loss.

The tax liability is $15k less due to AGI reduction. But don't you also get an additional tax refund for contributing an extra $31,000 into the Indiv 401k?

making a $25K contribution and taking a $25K loan and then deposit $21K into the account and pay off my car. I don't want the car payment AND the 401K loan payment.

Yes - except that I wouldn't pay off the car (unless you have a bad rate). I would keep the car loan and use extra income to clear the 401k loan - that gets the 401k working for you (at a higher return than the car loan), that would be a better use of capital.

[hcj]

The additional $31,000 contribution takes what I have to send the government down to $900 instead of $15,000 or so.

The car is at 6.25%

[phil5185]

So you have $28k and you need $46,900 to contribute $46k and pay the $900 taxes? I would borrow the $19k and then give priority to repaying - as opposed to prepaying the car.

But I agree, the 6.25% is kinda pricey - credit union, dealer, or bank?

[hcj]

That pretty much sums it. Thanks for wieghing in. I financed the car with Toyota Motor through the dealership. I have about $20K in backlogged commissions coming. It's the comm that I put away for taxes and retirement contributions, but I think I should use a good chunk of that to make some tax quarterly payments.

[DVM gone riding]

how do you cont 31k to a 401k in one year?? Is this because you are self-employed are am I missing something?? I thought the max was 16500?

[hcj]

It's an individual 401K and they changed the law recently where you can contribute up to 100% of your income to a max $49,000. I work for a New Zealand company as a contractor, so technically I'm self employed.

I don't even get a 1099 from them because they are a foreign company, but I declare all of my income and do a schedule C for the small expenses that I don't get reimbursed for. I have been working for them since 2005 and could actually become a real employee, but they don't even have a basic 401K for US employees, so I choose to stay as a contractor.

[qofcc]

That's a very creative plan!

[Plain Old Petunia]

Hcj, you have an amazing ability to think outside the box. I wish I had it too! Your plan makes sense IMO.

[DVM gone riding]

shoot I say any time you get to legally cheat the IRS out of taxes go for it!! Now that I understand how you can. So basically you are going to put 46k in and immediately borrow 25k back out that you will then have to pay back over time but without penalties.

[TheOtherMe]

It isn't called cheating, it is called tax avoidance and is totally different than tax fraud. Tax fraud is illegal, tax avoidance isn't.

[hcj]

Trust me, with the deficit as it is and the liberal that I am, I'm really having a hard time with this. It's what the tax law allows though and I DO NOT deduct anything that really shouldn't be deducted, which partially explains the reason my taxable income is so high. I do feel guilty for considering this because it is going to affect what the Feds get, but when it's all said and done, funding this large 401K contribution is going to make my world very tight. I'm going in debt, albeit to myself, but it's still a monthly obligation. I don't write the tax laws, but I follow them wihtout fudges. And if I have to be perfectly honest, it really seems that if I make this perfectly legal large contribution to my individual 401K that hubby and I are not paying enough in taxes. In fact, it's ridiculous what we'll pay this year AND we still wouldn't be hit with AMT.

[qofcc]

I do feel guilty for considering this because it is going to affect what the Feds get

I don't see why you should feel guilty about not paying money you're not obligated to pay to people who are outright wasting it. I'm sure you'll put the money to better use than the feds. If it will make you feel better, why not buy something or donate money to something that you think the government should support but doesn't?

[Deleted]

I say get over the guilt and go on with your plan

[thyme4change]

Why did you refinance the same house twice in one year? It seems like you would lose all benefit from it with any closing costs, etc.

[hcj]

Mar 28, 2011 10:21:18 GMT -5 thyme4change said:

Why did you refinance the same house twice in one year? It seems like you would lose all benefit from it with any closing costs, etc.

went from 5.875 to 4.875 and then to 4.25 that had no closing costs and actually gave us a credit beyond closing costs. The second one all we had was additional upfront MI. We're in Southern California, so you can imagine the loan amount is high enough to where the rate makes quite a difference per month. Had I known in Jan what rates would be like in Nov, I would have only done it once