how to model 401k loan?


I will take a hiatus from work during which I'll need to use our tax-deferred accounts. If I take a withdrawal I have to pay taxes and can't put it back. My wife will be continuously employed. If we take a loan from her 401k we won't pay taxes on it and can replete it when I return to work.

Suggestions for how to model that? Non-taxable special income and non-deductible special expenses? But how do I model the effect of diminished income on the 401k, from the balance being temporarily reduced? A special expense in years when the balance is reduced, to reflect the lost income only in that year?


dan royer's picture

The usual way is:

Special Receipts for the income (not taxable). Special Expenditures for the loan repayment (breaking things into two pieces if necessary, one taxable principal repayment, one for deductible interest). So you have it right that far.

I suppose depending on the amount, I would perhaps ignore the consequence of the lower balance and address that this time next year with a balance adjustment. We all pretty much adjusted up our balances this year anyway, so one year may not have that big of an impact. But if it's multiple years I suppose you could also just reduce the balance now. And then readjust it back up in a few years when the loan is repaid.


Thanks, Dan. I'd probably pay it back within 12 months. The opportunity cost of $50K not being invested is pretty small, compared to the overall portfolio. As you say, it will even out on a future year update, anyway.