Comments on: 401k Loan Double Taxation Myth http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html like a friend telling you about money ... Thu, 19 Nov 2009 19:44:17 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Reggie http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2883 Reggie Mon, 09 Nov 2009 22:33:37 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2883 Good discussion. Clarified it for me. I have read the explanations of the hotel puzzle, but I think my explanation is easier than any I have seen: Each man pays $25/3 for the room and $2/3 to the bellboy. $27. Its as simple as that. Good discussion. Clarified it for me. I have read the explanations of the hotel puzzle, but I think my explanation is easier than any I have seen:

Each man pays $25/3 for the room and $2/3 to the bellboy. $27. Its as simple as that.

]]> By: TFB http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2880 TFB Fri, 06 Nov 2009 22:35:22 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2880 Josh and Geoff - As I tried to show with the picture and in the post, if you pay interest to a bank and not take a 401k loan, your 401k money will earn some money from the financial market and you will have to pay tax on such earnings. You are not paying any more tax when you have a 401k loan versus having a non-deductible bank loan. Josh and Geoff – As I tried to show with the picture and in the post, if you pay interest to a bank and not take a 401k loan, your 401k money will earn some money from the financial market and you will have to pay tax on such earnings. You are not paying any more tax when you have a 401k loan versus having a non-deductible bank loan.

]]> By: Geoff http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2878 Geoff Fri, 06 Nov 2009 21:39:05 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2878 Josh, Yes you would be double taxed on interest but realize if you are paying the interest to the bank, they will be getting the money (and perhaps have to pay taxes on it) whereas if you are paying the interest to yourself, you will be getting it and of course have to pay taxes on it. Josh,
Yes you would be double taxed on interest but realize if you are paying the interest to the bank, they will be getting the money (and perhaps have to pay taxes on it) whereas if you are paying the interest to yourself, you will be getting it and of course have to pay taxes on it.

]]> By: Josh schneider http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2877 Josh schneider Thu, 05 Nov 2009 16:13:29 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2877 I agree on the priciple payments, but aren't you still being double taxed on the interest? I am paying interest on the loan, in theory to myself. I am paying that interest with post tax dollars, it is applied to my 401k account balance, then when i withdraw it during retirement, i pay taxes on it again. This is not the same with a bank loan. With a bank loan, i never get the interest back therefore i never pay taxes on it after i initially earn the money. I agree on the priciple payments, but aren't you still being double taxed on the interest? I am paying interest on the loan, in theory to myself. I am paying that interest with post tax dollars, it is applied to my 401k account balance, then when i withdraw it during retirement, i pay taxes on it again. This is not the same with a bank loan. With a bank loan, i never get the interest back therefore i never pay taxes on it after i initially earn the money.

]]> By: Karen http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2868 Karen Wed, 04 Nov 2009 09:58:05 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2868 If a person is paying 22 to 30% on a credit card and can borrow the money from the 401K at 6%, that is a savings of 16 to 24% . The payments would be from after tax dollars also. On $50,000, that is a savings of approx. $22,954 to 36,304 over 5 years. Which could be used to pay the loan off faster or contribute to the 401k if allowed. This takes a 30 year loan and converts to 5 years. I think that makes 100% sense! If a person is paying 22 to 30% on a credit card and can borrow the money from the 401K at 6%, that is a savings of 16 to 24% . The payments would be from after tax dollars also. On $50,000, that is a savings of approx. $22,954 to 36,304 over 5 years. Which could be used to pay the loan off faster or contribute to the 401k if allowed. This takes a 30 year loan and converts to 5 years. I think that makes 100% sense!

]]> By: Geoff http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2827 Geoff Sun, 25 Oct 2009 02:08:20 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2827 What it comes down to on the double taxed interest is that you are paying taxes on the interest you have paid back on a 401k loan because you have the interest you have paid whereas if you got a loan from a bank, they would have the interest, not you... therefore, really the only problem with a 401k loan is the potential losing of the job or the loss in market gain of the money current invested in the market. What it comes down to on the double taxed interest is that you are paying taxes on the interest you have paid back on a 401k loan because you have the interest you have paid whereas if you got a loan from a bank, they would have the interest, not you… therefore, really the only problem with a 401k loan is the potential losing of the job or the loss in market gain of the money current invested in the market.

]]> By: Shawn http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2743 Shawn Tue, 29 Sep 2009 17:59:47 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2743 It's true that you are not double taxed on the principal repaid (you take it out and you put it back in with no tax impact on either end). To possibly clarify and agree with kc above, there is double taxation on the interest you pay yourself back with. That is essentially an additional contribution to your 401k account. It is made with after tax dollars, and it is taxed when taken out. Still, that is only a fraction of the amount borrowed and a relatively small price to pay for the flexibility. It's true that you are not double taxed on the principal repaid (you take it out and you put it back in with no tax impact on either end). To possibly clarify and agree with kc above, there is double taxation on the interest you pay yourself back with. That is essentially an additional contribution to your 401k account. It is made with after tax dollars, and it is taxed when taken out. Still, that is only a fraction of the amount borrowed and a relatively small price to pay for the flexibility.

]]> By: kc http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-2271 kc Wed, 17 Jun 2009 05:37:39 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-2271 ajk is right except for one point. You do not just pay back the money into your 401K interest free so really the scenario is: Put money into 401(k) - not taxed; take money out as loan - not taxed; put the same money back into 401(k) to repay loan - not taxed; take money out at retirement - taxed once and only once PLUS put the interest owed on the loan back into 401K from your savings which has already been taxed and will be taxed again when you eventually withdrawl it from your 401K. Hence the double taxation. ajk is right except for one point. You do not just pay back the money into your 401K interest free so really the scenario is:

Put money into 401(k) – not taxed; take money out as loan – not taxed; put the same money back into 401(k) to repay loan – not taxed; take money out at retirement – taxed once and only once PLUS put the interest owed on the loan back into 401K from your savings which has already been taxed and will be taxed again when you eventually withdrawl it from your 401K. Hence the double taxation.

]]> By: The Real Buff http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-1930 The Real Buff Sat, 18 Apr 2009 14:54:26 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-1930 Sage, I agree with your assessment of the lost opportunity cost. Also, remember that 401k's are limited, and only about 1/3 of the plans even offer a fixed income option (and equity index funds don't count as fixed income). The mutual fund industry is going to fight hard to keep it that way, but hopefully there will be some changes. By the way, is Dave Ramsey still assuring everyone they can get 12% in a "good" mutual fund? There is another piker conveniently neglecting to talk about ACTUAL instead of AVERAGE. I digress... The 401k should never be used as a borrowing tool. Although, really what you are doing is saying, "Uncle Sam, I need some of that money back that I gave to you to hold, and I understand that I will have to pay you back plus interest out of the money that is left after I pay you those taxes." Many of you are focusing on this whole "double taxation" debate, and you are missing the point. Taking money from your 401k is just plain dumb, with very few exceptions (i.e. you have no options left). It could be argued that just having and contributing to a 401k is just plain dumb, unless you have good match and contribute up to it but no more. You are not really borrowing anything. I just generally stay away from any vehicle that has an Internal Revenue Code. The government has clearly demonstrated its inability to manage anything to do with money and anything that has an IRC number was probably not created with MY best interest in mind. If anything, I'd be putting money into a ROTH 401 (before they take it away), but even that is questionable and not too many companies offer it anyway. Does anyone here actually believe they will be in a lower tax bracket at retirement? And who do you think is going to be enlisted to help save Social Security, Medicare, and pay for all this money being created to "save" the economy? I worry about the baby boomers, but also my generation. Ask yourself this question... "Do you think that the government would ever pass legislation that would cap the tax rate someone would pay on the distribution of their 401k? For instance, you are in a 25% bracket now, but you would know you would never be paying more than 30% on the distribution? Why do you think the government would or would not do this? *And just a disclaimer here, I think Bush was a puppet and Obama is realizing he is a puppet too. I am not talking about left vs right here. Sage,
I agree with your assessment of the lost opportunity cost. Also, remember that 401k's are limited, and only about 1/3 of the plans even offer a fixed income option (and equity index funds don't count as fixed income). The mutual fund industry is going to fight hard to keep it that way, but hopefully there will be some changes. By the way, is Dave Ramsey still assuring everyone they can get 12% in a "good" mutual fund? There is another piker conveniently neglecting to talk about ACTUAL instead of AVERAGE. I digress…

The 401k should never be used as a borrowing tool. Although, really what you are doing is saying, "Uncle Sam, I need some of that money back that I gave to you to hold, and I understand that I will have to pay you back plus interest out of the money that is left after I pay you those taxes." Many of you are focusing on this whole "double taxation" debate, and you are missing the point. Taking money from your 401k is just plain dumb, with very few exceptions (i.e. you have no options left). It could be argued that just having and contributing to a 401k is just plain dumb, unless you have good match and contribute up to it but no more. You are not really borrowing anything.

I just generally stay away from any vehicle that has an Internal Revenue Code. The government has clearly demonstrated its inability to manage anything to do with money and anything that has an IRC number was probably not created with MY best interest in mind. If anything, I'd be putting money into a ROTH 401 (before they take it away), but even that is questionable and not too many companies offer it anyway. Does anyone here actually believe they will be in a lower tax bracket at retirement? And who do you think is going to be enlisted to help save Social Security, Medicare, and pay for all this money being created to "save" the economy? I worry about the baby boomers, but also my generation.

Ask yourself this question… "Do you think that the government would ever pass legislation that would cap the tax rate someone would pay on the distribution of their 401k? For instance, you are in a 25% bracket now, but you would know you would never be paying more than 30% on the distribution? Why do you think the government would or would not do this?

*And just a disclaimer here, I think Bush was a puppet and Obama is realizing he is a puppet too. I am not talking about left vs right here.

]]> By: SageGriot http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html/comment-page-1#comment-1753 SageGriot Sat, 21 Mar 2009 03:22:18 +0000 http://thefinancebuff.com/2008/07/401k-loan-double-taxation-myth.html#comment-1753 This so-called "interest" being paid on 401k "loans" is also a misnomer, IMO. If paying interest to oneself is good, wouldn't a higher interest rate be better? I believe the true cost of a 401k loan has nothing to do with the interest rate and everything to do with the oppourtunity cost. It is important to remember the loan proceeds come from liquidation of assets in the plan (so it really NOT a loan). If the plan sells stock that doubles in value while you are paying back the loan, your true cost is the difference between the stock which would have doubled in value if it had not been liquidated and whatever avererge cost you pay as payments are applied to the account. This is why I always take 401k loans from the cash allocation in my 401k which fixes my oppourtunity cost at whatever fixed rate that account is earning (usually under 5%) This so-called "interest" being paid on 401k "loans" is also a misnomer, IMO. If paying interest to oneself is good, wouldn't a higher interest rate be better? I believe the true cost of a 401k loan has nothing to do with the interest rate and everything to do with the oppourtunity cost. It is important to remember the loan proceeds come from liquidation of assets in the plan (so it really NOT a loan). If the plan sells stock that doubles in value while you are paying back the loan, your true cost is the difference between the stock which would have doubled in value if it had not been liquidated and whatever avererge cost you pay as payments are applied to the account. This is why I always take 401k loans from the cash allocation in my 401k which fixes my oppourtunity cost at whatever fixed rate that account is earning (usually under 5%)

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