4073 / Is interest on a loan under a tax sheltered annuity deductible?

Interest on a loan not treated as a distribution ( Q 4063) made, renewed, renegotiated, modified, or extended after December 31, 1986, is not deductible. No basis is created in a participant’s account with respect to nondeductible interest paid to a plan.¹

Interest paid on amounts borrowed under a retirement plan for the purchase or improvement of a principal residence is deductible as qualified residence interest if the loan is secured by a recorded deed of trust, is not the participant’s account balance,² and is deductible. Because custodial accounts and annuity carriers typically are unable to perfect a security interest, interest on these types of loans from 403(b) arrangements will not be deductible.