If a 401(k) participant needs to borrow money from the plan, and may choose whether to borrow either deductible or nondeductible money, which would be the better choice?


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John L. Olsen, CLU, ChFC
Olsen Financial Group
St. Louis, MO
314-909-8818

My first look would be at the plan document. Many documents I worked with listed the order of accounts where loans would be taken from.

If the document is silent, I would probably start with after-tax dollars. If the participant terminates and "defaults" on the loan balance, at least the default has already been taxed at the personal level.

Hope this helps.

IMHO the plan SHOULD REQUIRE that he borrow first against after-tax money so that if there is a default there can be a distribution rather than a deemed distribution.

One nice advantage of after tax money is that you can borrow more than the maximum allowed under section 72(t), if you think that borrowing is nice.