Time Stamps:

1:25 – “Will I have to pay back a 401(k) loan with post-tax dollars?”

5:00 – “How cautious should I be of retiring when I still have substantial debt on my plate?”

8:45 – “Is it better to hold a REIT in a taxable account or a Roth IRA?”

11:40 – “What documents do I need to bring to a consultation with a financial advisor, and what should I expect to get out of a consultation?”

Mullooly Asset Podcast #191: Tim & Tom Take Your Questions – Transcript

Tom Mullooly: Welcome back to the Mullooly Asset Management podcast. This is episode number 191.

Tim Mullooly: This is Tim Mullooly.

Tom Mullooly: And Tom Mullooly.

Tim Mullooly: We’re going to keep on going answering those questions that we’ve been getting from you guys on a weekly basis. Some really great, unique, interesting scenarios and questions about financial planning and investments and pretty much anything that falls under our umbrella of expertise, you could say.

Tom Mullooly: Another podcast that we both listen to would say, “These are all fascinating.”

Tim Mullooly: Yes. So, let’s jump right into the questions. We have a couple good ones for you today. Yeah.

Tom Mullooly: The first question is about a 401(k) and getting a loan from a 401(k).

Tim Mullooly: Right. The question is, “Will I have to pay back a 401(k) loan with post-tax dollars?”

Tom Mullooly: The short answer is yes, you will have to pay back a 401(k) loan with post-tax dollars. Think about it. If you could pay back a 401(k) loan with pre-tax dollars, why wouldn’t everyone have the maximum loan all the time?

Tim Mullooly: Right.

Tom Mullooly: Because they’d just be shoveling pre-tax dollars into their 401(k) plan, as much as they could. So you’re always going to be paying back a loan from a 401(k) with post-tax dollars. I think the real question, though, is, he said, “When I retire and start withdrawing the money, will I again be paying taxes on it?”

Tim Mullooly: And that answer is no. Most 401(k)s, when you take a loan and you pay it back with post-tax dollars, that money is tracked. They can tell which money was used to pay back a loan, which is post-tax, which is pre-tax. They should be able to keep track of that so that you’re not taxed on the money twice.

Tom Mullooly: Right.

Tim Mullooly: Because otherwise, it would seem very foolish, even more foolish to take a loan from your 401(k) if you have to pay taxes on it twice.

Tom Mullooly: Right. Not every 401(k) plan in the United States has the ability for participants to take loans. Understand that if you happen to be in a plan that permits loans, you’re in a pretty sophisticated plan and they have the accounting software to keep track of your pre-tax and your post-tax additions. Paying back a loan will definitely be a post-tax addition to your plan balance. Now, understand that post-tax additions like the money you use to pay back a loan cannot be rolled over into an IRA after you retire. You’re just going to get a check for that money.

Tim Mullooly: Right.

Tom Mullooly: Yeah, that’s not going anywhere.

Tim Mullooly: I think if your plan offers you the ability to take a loan and you’re unsure, a good thing to do would just be to ask the plan if they keep track of that, because they should, and if they’re not, you really should think twice about whether or not to take the loan.

Tom Mullooly: One other follow-up question that I think I would say. If you’re calling your 401(k) plan administrator, like Tim just mentioned, ask them what happens to the contributions. Do they go into the money market? Do they go into some kind of stable value fund? What happens to the actual dollars that you send in?