How to Deduct Loans From Retirement Funds for Taxes
- 1). Compile the amount of money you will need to pay the taxes. You don't want to incur debt more than what you owe the IRS.
- 2). Contact your existing 401k administrator. The IRS allows employers to offer loans up to 50 percent of your vested amount up to $50,000. Plan administrators may have lower allowances. You need to know what you can borrow.
- 3). Roll an existing IRA into your 401k plan if you need to build your balance up to take a higher loan amount. For example, if your tax bill is $20,000 but you have $12,000 in your 401k, you will be allowed to borrow up to $6,000 against that asset. If you had an IRA with $40,000 that was rolled into the plan, you would increase your account balance to $52,000, allowing you up to $25,000 to borrow depending on your plan rules. Obtain rollover paperwork from your plan administrator and submit the request to your IRA custodian.
- 4). Fill out loan paperwork with your 401k plan administrator. Loans must be repaid within five years of the loan inception date using at least quarterly payments. If you leave your employer, the loan must be repaid immediately.
- 5). Pay the IRS from the loan amount.
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