Need cash? Borrow from that retirement plan

Things are a little tough, these days, with houses not selling, the market going sideways, prices rising (notably petrol), and cash in general just becoming a little bit tight. Say you need a little cash, and just don’t want to head down to the local Shylock to find some at an exorbitant rental rate?

Check out your account balance in your company's retirement plan. Maybe there’s some room, there, for you to find a little liquidity at a reasonable cost!

Obtaining a loan from that retirement plan may even be a relatively cheap way to go.
And better yet, you will be paying interest to yourself — the interest you pay will go right back into that plan, to compound tax-deferred for years to come!

But be prepared to dot your I’s and cross your T’s. If you don’t follow the rules, disaster lurks at every turn.

Not the least of which is the notion that if you take bucks out of your plan, ostensibly as a “loan,” without being careful, be prepared to pay tax on the money — plus a tidy penalty if you’re under 59 and a half.

To stay clean on a deal like this, borrow the lesser of $50,000 or half the present value of your accrued benefit under the plan — check with your plan administrator if you don’t know the latter of these two amounts.

Further, take care to repay your loan within five years in substantially level payments — no less often than quarterly.

(This five year repayment rule, however, doesn’t apply to a loan used to buy a dwelling which, within a reasonable period of time, will be used as your principal residence.)

And make sure you give your retirement plan a legally enforceable promissory note — including a provision that you will pay a reasonable rate of interest.
Don’t plan to deduct that interest on your tax return, however.

And aside from everything else — don’t default on the loan.

If you do, Uncle Sam will come calling with his hand out, claiming that all you have done is take a taxable distribution from your retirement plan.

Not a good result.

And all of you Californians, out there, who imbibe every now and then, should note that the cost of your peccadillo will soon increase — beginning Oct. 1, flavored malt beverages will be taxed as if they were distilled spirits (drinks with ostensibly a little bigger “kick”).

And get this: the tax rate of distilled spirits, we hear, is something north of $3 per gallon, rather than the measly $0.20 currently charged for the drinks with a lesser punch.

Looking at it from Ahnold’s point of view, this means something like $41 million, annually, in the form of new sales and excise taxes.

Brings a whole new meaning (and cost) to “drowning your sorrows.”

CONSULT YOUR TAX ADVISER - This article contains general information regarding various tax matters. You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He is also a contributor to the recently published eleventh edition of Tax Savvy for Small Business, published by Nolo. He can be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.