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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Hello, I am planning to borrow from my 401k account, and

Customer Question


I am planning to borrow from my 401k account, and then pay it within a year or less. my questions are: what if the total amount that I pay exceeds my yearly limit for contributions?(i am hoping it will not be counted since they will be to repay my 401k loan) also will my total taxable income go down proportionately with the increase in my 401k deductions?..will it also lower my tax bracket? also if i totally repaid my debt in less than a year, can i reloan and repay again using the same cycle?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.

Hello 007,


When you take a loan from your 401k plan and then make payments to repay the amount you borrowed, those payments do not count as new contributions. So they do not count towards the limit that you can contribute to your plan in any year that you are making loan repayments to your plan.


Those repayments also do not reduce your taxable income for the year. The only thing that reduces your taxable income is new contributions you made to the plan.


As far as whether or not you could pay off your loan in less than one year and than take out another loan, that would be up to your plan administrator. The rules for 401k loans are set by your employer or plan administrator and can be different for each plan. So you would need to check with your employer to see if this would be allowed. Generally if a 401k plan allows loans, the amount you may borrow is limited to 50% of your account balance. So as long as your plan allows for loans to be made, then as long as your outstanding balance on a loan is not more than 50% of your total account value, then normally they would allow another loan to be taken. But you would need to check your plan rules with your employer to be certain this applies for your plan.


If this was helpful please press the Accept button. Positive feedback is also appreciated.


Thank you 007



Merlo and 3 other Tax Specialists are ready to help you
Customer: replied 7 years ago.
let me make sure i understand payments towards the loan will NOT reduce my taxable income....only the NEW contributions will.....what about if I work on two institutions. And my total gross income on each respective employer will bring down my Tax bracket to say employer X earning times 15%...employer B earning times 15%...which will surely bring down my taxes....:my question is at the end of the year will the IRS add the two incomes?..and if they will do, in case the total raises the tax bracket, will the IRS recompute,,,and if the total places me on the 25% bracket, will they recompute everything and make me pay for the difference?
Expert:  Merlo replied 7 years ago.

Hello 007,


First, you are correct in your understanding that your 401k loan payments will not reduce your taxable income. Only your new contributions to a 401k plan reduce your taxable income.


As far as working for two different employers, your tax bracket is not based on how much you make with each employer. It is based on your total earnings for the year. Each employer that you work for will send you a W-2 form at the end of the year to report the amount of earnings that you had for the year. When you file your tax return, you will report the total of all your earnings from all the W-2 forms you received, and it is that total income of all employers combined that determines your tax bracket.


So the IRS will not actually be the one who "recomputes" your income. You will simply report your total income on your tax return and pay the taxes based on that total income amount.


Normally when someone works more than one job, they arrange to have extra taxes withheld from their checks to cover the taxes that they will owe at the end of the year, based on their total income from all jobs.


If this was helpful please press the Accept button. Positive feedback is also appreciated.


Thank you 007




Edited by Merlo on 1/1/2010 at 4:41 PM EST