When I was getting ready to buy my first home recently, I read in “More Wealth Without Risk” by Charles Givens that I could borrow money for a down payment from my 401(k) and secure the loan via a second mortgage note on my house. That way, the interest would be tax deductible. I talked to an IRS agent who said the loan would be secured by funds in the 401(k) and is therefore not deductible. Who is right?
Under law, interest is deductible as mortgage interest if a house is collateral for a loan.
Thus Gary A. Case, an accountant who did research for the Givens book, argues that if you give your employer a piece of paper saying that the loan is a second mortgage on the house, you’re OK. But Howard Golden, a partner in the employee-benefits consulting firm Kwasha Lipton in Fort Lee, N.J., points out that “no employer would agree to become the holder of your mortgage,” since doing so would violate federal law governing the handling of pension funds. Besides, the loan is already secured.
With a 401(k) loan, you can borrow only as much as 50 percent of your funds, and if you default your employer will take what you owe from the balance. Of the Givens strategy, IRS spokesman Henry Holmes adds, “If you try it and we identify it, we’re going to challenge it.”
