Submitted By: Susan
Answered: December 9, 2015 11:48 am

I took a $4,000 loan from my 401(k) account at the end of 2014. I repaid it in full this year. Can I take a deduction for the repayment?

A repayment of principal is never deductible. Interest on the loan may be deductible, depending on what you used the proceeds for. If you purchased securities, the interest is treated as investment interest deductible as an itemized deduction to the extent of net investment income. If you used the proceeds to buy a principal residence or second home and you are not a key employee, you can usually obtain a full interest deduction if the loan is secured by the home. But if you used the proceeds for personal reasons (e.g., paying medical or college expenses), no interest deduction is allowed.

advertisement
Tax Glossary

Accelerated cost recovery system (ACRS)

A statutory method of depreciation allowing accelerated rates for most types of property used in business and income-producing activities during the years 1981 through 1986. It has been superseded by the modified accelerated cost recovery system (MACRS) for assets placed in service after 1986.

More terms