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CGCPA
CGCPA, CPA
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I have a self-directed 401k. Last July 2009 I took out a loan

Resolved Question:

I have a self-directed 401k. Last July 2009 I took out a loan of $40,000, and on my application I stated that my monthly repayment would be $850.86. I made a one time payment shortly on 10/27/09 of $10,500, and nothing since. Now I find out that the IRS as rules that you have to make regular quarterly payments on it. So I called Etrade where the account is held and I told them to make a note that the $10,500 was for "12 monthly payments".

My question is: will the IRS really be so stringent that they care about the payments really being quarterly? I don't want to be in default, and of course, since I am the plan administrator, I don't really care when payments are made. I plan on repaying everything within 5 years, as required. Am I in jeopardy of the loan being counted as an early distribution? What can I do to avoid this?
Submitted: 3 years ago.
Category: Tax
Expert:  CGCPA replied 3 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

 

If you keep making lump sum payments and they cover a number of monthly payments so that you are never more than 3 months behind you will fine. A better approach would, of course, be to schedule regular monthly or quarterly payments. However, as long as this gets paid and is not allowed to be in arrears more than 3 months , no problem.

Customer: replied 3 years ago.
Thanks.
So even if that lump sum was for more tha 3 month's of payments it's fine since I was never behind more than 3 months?

Also, is it fine that I keep detailed records on the side? Etrade only sees the payments, but it could get complicated.

One more quick question: there are several ways to calculate interest. Can I just choose the simplest method, which would be simple, yearly, as a percent of the loan amount? Or do I have to at least calculate it based on the end-of-year balance, or based on the beginning-of-year balance? Does the interest get added after every 12 months orin every January first?
Expert:  CGCPA replied 3 years ago.

You are correct on the first item, as long as you do not get behind more than 3 months you will have no issues.

.

The interest should be calculated on a payment made basis just like a home mortgage/credit card. This will produce a potentially larger interest amount but since you are paying it to yourself it really will not matter and if the loan was used for business purposes may even produce a heftier tax deduction. Amortization schedules are available online for free and are very easy to use. If you want to really get the most for the interest deduction have the software do the calculation based on the actual payment dates.

 

Nice to hear from you again.

CGCPA, CPA
Category: Tax
Satisfied Customers: 3738
Experience: over 40 years experience in tax matters
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