Is interest paid to finance the purchase of additional years service toward pension deductible?

Question

Situation: A person has a pension from a state run college. Upon retirement, they purchase additional years of service credits to increase the pension benefits. The person finances the purchase through unsecured loans as lenders will not accept the pension as collateral.

Can the interest paid be considered deductable as an investment expense? Thanks

Answer 1

My first thought is that it would not be.  However I have taken some odd things as investment expenses at the request of my clients and never have them questioned by the IRS.  I don't believe that this question has ever made it through the tax courts so I would give it a try, recognizing the consequences if you are audited.

Answer 2

My initial answer would be yes it is.  Also, the money paid to buy the extra years of service would be tax deductible since this purchase is being used to generate additional taxable income.

That is just my take on the situation.

Answer 3

Good question.  Interest paid non loan obtained for payment for a retirement program are NOT tax deductible. The idea is that you can not borrow money to shelter, or defer taxes, on the retirement funds.