Take a 11k loan from 401k to fund an IRA??

[fuzzystache]

I think the pros outweigh the cons but please let me know your thoughts..

Tax scenario for 2016:
Married filing jointly
401k's maxed $36k
79k adjusted gross income
$0 IRA contributions

Financial situation:
70k balance combined outstanding student loans. The plan is to never payback the full amount - currently $40k is 7 yrs into the 25 year income-based repayment plan and 30k of the balance is 2 yrs into a 10 yr public service forgiveness program.

Pros
If we take a 11k loan from a 401k plan and fund an IRA, it will reduce AGI to 68k, which will reduce student loan payments and increase income tax refund while maintaining the same amount of money invested.

Cons
401k loan payback is made with after tax $
Risk of layoff or change of employer

[AnEDO]

Sounds like a good plan.

Even though you are paying back with after tax, you aren't paying tax on the money you're using to fund your IRA.  So the only bad part is paying ordinary income tax on the interest you pay to yourself while repaying the loan when you someday withdraw it from your 401k/IRA. 

Regarding the risk of layoff, most employer plans give you the ability to repay the 401k loan up to a year if you do get laid off. 

[erutio]

Cons
401k loan payback is made with after tax $

why dont you just put this after-tax money into the TIRAs?

[dandarc]

erutio - fuzzy needs 11K by April 15th for the plan to go.  This is going to be a 2016 IRA.  Really, with the student loan payment adjustment, probably the sooner they get this done and taxes filed the better.

[dandarc]

I'm assuming you don't have $11K or more available in a savings account or something?

[Telecaster]

This is a bad idea.   As you point out, you are using after tax dollars to re-pay your pre-tax dollars.  So while you might save a little bit on tax now with the IRA contribution, it won't be that much because you'll lose most it on the backend when you repay.   

But it is worse than that, because when you retire, you are taxed again on the withdrawals.   

[moof]

This is a bad idea.   As you point out, you are using after tax dollars to re-pay your pre-tax dollars.  So while you might save a little bit on tax now with the IRA contribution, it won't be that much because you'll lose most it on the backend when you repay.   

But it is worse than that, because when you retire, you are taxed again on the withdrawals.

This.  It sounds like you are after the student loan deduction, which perhaps has some merit.  But unless you have put together a spreadsheet and compared both scenarios in detail I am guessing you will end up worse off overall.

[josh4trunks]

This is a bad idea.   As you point out, you are using after tax dollars to re-pay your pre-tax dollars.  So while you might save a little bit on tax now with the IRA contribution, it won't be that much because you'll lose most it on the backend when you repay.   

But it is worse than that, because when you retire, you are taxed again on the withdrawals.

It sounds like you think 401K loans are double taxed. With a 401K loan, the only money being double taxed is the interest you repay to yourself.
The cost of the loan is the set interest rate times whatever the future tax rate will be on the withdrawal. For example 4% x 15% = 0.6%, which is a better deal than any other loan I know of. But, the real cost to factor here is the opportunity cost, you are missing out on possible gains (or losses) because that money is not invested.

[fuzzystache]

Thanks for the input.

We don't have 11k in a bank or credit union account or else I wouldn't be asking this question. I would like to file my taxes in a week or two to take advantage of the lower student loan payments.

The main goal is the student loan payment reduction. And if I file our annual re-certification before we file our 2017 income taxes, the 2016 tax return will be used again for the student loan payment calculation, so it would be 2 years of payments with the lower 2016 income.