Hey there YouTube, thanks for watching Mentorship Monday! This series is all about you! Just email your questions to HelpMe@DeRosaGroup.com and Matt Faircloth will answer your questions right here on the channel for you and everyone else to learn from! In this video we mention Matt's Webinars for Bigger Pockets. Just go to www.biggerpockets.com/webinars to sign up for a FREE webinar lead by Matt Faircloth!
Today's question comes from Sam. Thanks Sam! Here is his question in his own words:
I recently joined Bigger Pockets and watched your recent webinar on raising
private capital through self directed IRAs. Really cool topic that I was
unaware of. Thank you for sharing!
A little bit on me, I worked in construction management/real estate
development for six years after graduating from undergrad, and then went
back to a full-time MBA program. I graduated this past May and have one
investment property in Boston and a primary residence in a Boston suburb.
I watched your video on taking a loan against a 401k and just wanted to
highlight one important distinction. I looked into this option and from my
understanding, there is an important tax implication that you left out of
your video.
Given that 401k is pre-tax money, you would think that you could pay back
the loan principal and interest with pre-tax money. However, through my
discussion with Vanguard, I was told that the loan is repaid with after tax
dollars. Therefore you are paying taxes on your paycheck, then returning
the loan principal plus interest to the 401k, only to be taxed again on the
401k distributions during retirement.
On top of this, the interest payments are not tax deductible as they are on
mortgages or student loans. So on top of the double taxation, you don't get
the benefit of lowering your taxable income through the interest payments.
Given the importance of taxes on real estate transactions, I wanted to
circle back with you to clarify these negatives on borrowing from your
401k. These are ultimately the reasons I decided not to take out a loan
from my 401k!
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Mentorship Monday for Real Estate Investors
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