curiousgeorge408[at]hotmail.com wrote:

- quote -

yes, the lesser. If the balance is $60K, she can borrow $30K.


- quote -

The rate is tied to prime as a guide, and while the prime changes, a
401(k) loan is usually (always?) fixed. It's set when the loan is
issued. As far as how it's paid back, the excel functions still work. I
saw your later post, and the phrase "level amortization" should not
throw you off.

- quote -

The payment is deducted from the paycheck, you *can't* be late.

Phil is right to caution against this. Individual circumstances vary of
course, but the worse case scenario (losing the job and having the loan
deemed to be a distribution) should be carefully considered.
You don't mention anything else about her situation, why she needs the
money, what her alternatives are, etc. We'd likely try to council her
against the idea.

I'll chime in and say the 401(k) plan administrator is the place to go
for most of the details you seek, again, IRS pub regarding this is a
guideline, not a final plan document.

Joe

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<curiousgeorge408[at]hotmail.com> wrote:

- quote -

You've already been told where to get that information--the plan. You wind
up there anyway if you want the loan, so why piddle around guessing? Also
note that Code requirements are limits, not requirements. They're not
required to offer loans at all.

One thing hasn't been mentioned. IMO 401(k) loans are a horrible idea.
Life rarely plays out the way we anticipated it would, and especially in
this economy's atmosphere of uncertaintly, pay close attention to the
requirements if the borrower no longer works for the sponsor of the plan.
More than one has wound up with a taxable deemed distribution, with
premature distribution penalty, and no cash to pay the tax.

--
Phil Marti
Clarksburg, MD

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On Dec 10, 6:10*pm, an_ordinary_guy_...[at]hotmail.com (Bill) wrote:
- quote -

I think it is counter-intuitive to think that a publication
like Consumer Reports would an unqualified summary
of rules that are completely flexible and solely
determined by the terms of individual employer plans.


- quote -

I did better than that. I searched for "401k loan".
References pointed me to IRC 72(p), which specifies
most of the requirements outlined in the Consumer
Reports article. To wit:

1. IRC 72(p)(2)(A) states that the amount of the loan
is limited to the lesser of $50,000 and the greater of
$10,000 and 50% the vested balance.

2. IRC 72(p)(2)(B) states the loan must be repayable
within 5 years.

I do not find anything specific about the interest rate,
but I do find this requirement:

3. IRC 72(p)(2)(C) requires a "level amortization" with
payments no less frequent than quarterly.

Apparently that means that each payment has the same
amount of principal and interest, in contrast to "mortgage
amortization", which is the kind of loan payment that we
are used to (e.g. using Excel functions PMT, FV and RATE).

I also looked a 26 CFR 1.72(p)-1. There, I find references
to examples of qualified loans "with adequate security and
with an interest rate and repayment terms that are
commercially reasonable".

I don't know enough about what is "commercially reasonable"
to know if this implies what Consumer Reports wrote about
the required interest rate, or if perhaps some other IRS
bulletins embellish their interpretation of IRC in more detail.

But if I were capable of researching and understanding this
myself, I would not be asking for assistance in this forum.

So if any knowledgable person can offer a constructive
explanation of or pointer to any requirements about the
interest rate, I would appreciate it.

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curiousgeorge408[at]hotmail.com Posted:

- quote -

Your academic interest may be satisfied by resourcing http://www.irs.gov
... and then use their search engine for "401k Plans" ... and you will
discover that the operative rules are established by the employer who
chooses to set up the plan. (Reference will bring up #424)

A publication for guidance of employers is cited, but the actual rules
that control loans from your relative's 401k will be set out in the plan
documents, available from the employer in question. That would be the
accurate source for details that would apply to those participating in
that particular plan.

Bill

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

A relative asked me for advice about 401(k) loans. I told her
I am not the right person to ask. I also passed along some
information from the Nov08 Consumer Reports "Money Advisor",
with appropriate caveats.

But her questioned piqued my curiosity, purely academic.

1. What IRS Pub discusses the requirements and limitations
for 401(k) loans, if any?

2. CUMA states: "loans are limited to $50,000 or 50% of
your vested balance".

Is that the __lesser__ of the two?

(Not to be confused with the "lessor" :-> .)

3. CUMA states: loans must be repaid "at an interest rate
about 1 point above prime".

Is that the WSJ prime rate? If not, where do you find the
prime rate applicable to 401(k) loans?

4. The prime rate is variable. What is the requirement for
dealing with that? Is the 401(k) loan interest rate actually
variable? Or is it a fixed rate based on the prime rate at
the outset of the loan?

5. What is the penalty for being late with or missing a
payment?

What is considered "late"? That is, is there a specified
grace period (or explicitly none)? Or is "late" simply the
same as "missing"; that is, it is late when the next
payment becomes due?

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >