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Can I deduct interest on a 401(k) loan to my business?

December 14, 2012: 6:30 AM ET

Let's say I make a loan to my (or my wife's) business by borrowing from my 401(k) and using the money for business expenses. Is the interest the business pays back to my 401(k) plan tax deductible? — Michael R.

The short answer is no, according to Myrna Mitnick, a senior tax manager at Baltimore, Md.-based CPA firm Leonard J. Miller & Associates. The IRS typically does allow businesses to deduct the interest they pay on loans, but a different set of rules applies when the loan comes out of a 401(k).

Mitnick explains that loan interest generally is nondeductible when the loan is secured by a 401(k) holder's plan balance, as long as any of the balance comes from elective salary deferrals. You have probably funded your 401(k) with elective salary deferrals, making the loan nondeductible no matter how you use the money.

— Marc Mewshaw

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Posted in: Retirement, Taxes
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