Comments on: 401k Loan Double Taxation Myth

By: Joe

Joe — Sun, 06 May 2012 22:39:24 +0000

Dana:
Take your 10,000 (from the tax-free 401k loan) to pay back the 10,400.
Your “first” tax on the 10K never occurred because it’s from a non-taxed source.
If the 400 is from a taxed source, then it will be double-taxed on removal.

It’s a silly loan to make but illustrates that you have (temporary) access to tax free money when you take a loan from a 401k.

By: Dana

Dana — Sun, 06 May 2012 18:46:34 +0000

As far as doule-taxation, I may be dense but I don’t understand these arguments. Suppose I take a $10,000 loan for 4 years and payback $50 a week.
That’s $2600 a year x 4 years = $10,400 – after taxes. When I retire and withdraw that $10,400 I’ll have to pay taxes on it. How is that not double-taxation? If I put that same $50 a week in without taking a loan that $50 only gets taxed when I withdraw it.
To say that I have to pay back any other loan with after-tax dollars or the money wasn’t taxed when I originally put it in are not valid arguments and doesn’t even pertain to the situation.

By: TFB

TFB — Fri, 06 Apr 2012 07:08:34 +0000

Vinod – If you didn’t borrow from the 401k account, you would still pay tax on your salary (tax #1), the money in your 401k account would still earn something from somewhere and you would still pay tax on that earning (tax #2). You are taxed twice regardless. Double taxed implies you pay an extra tax if you borrow. That’s not the case.

By: Vinod Sindhu

Vinod Sindhu — Fri, 06 Apr 2012 06:43:17 +0000

OK,

All of you are missing one part.

Lets say you borrowed 500 from 401K and paid back 550, here $50 is the interest on which you have already paid taxes. Now when you will withdraw this $50 after retirement again you will be paying taxes on it. That means you are taxed twice on the interest you pay on the loan from 401K.

By: dave

dave — Wed, 28 Mar 2012 20:19:34 +0000

Matt:
best way to look at this is this:

you put $1000 pre-tax money in a 401K
..eventually you are going to pay a tax when you make a withdrawl

you take out a $500 401k loan….you will be paying yourself some interest (like 4-5%_

3 months later you pay off the $500 loan ..yes you are using ‘after tax money’ to pay if off
but you’re using after tax money to pay off any loan

you pay off the $500 401K

when you take out the $500 401Kk money, you pay taxes..just like you were gonna pay taxes on it if you didn’t take out a loan at all.

…so in theory you paid off your ccard with ‘before tax money’

there is no double tax… you are paying tax on the 401K loan with some dollars, the fact that the dollars you have in your pocket that you were already paid tax on means nothing.

By: dave

dave — Wed, 28 Mar 2012 19:30:44 +0000

I’ve always thought the same thing, Suze is theorizing and not being mathematical. Another basic case is if you have some 20 percent credit card and carry a balance of lets say $5000, so you’re paying $1000 a year (ballpark) in interest…instead you take a $5K loan from your 401K, you pay yourself back 4-5% interest and you pay off your CCard. You’ve just saved $1000 a year in interest and while you did have to pay the interest to yourself ($250), you did not lose that money, it’s back in your account. Now multiply this time some number of years (considering the ccard balance is going down) and you find that you have likely saved at least a couple thousand bucks. And if you didn’t pay off the ccard with the 401k loan, well you’d be paying the credit card off with AFTER TAX DOLLARS. You’re always paying stuff off with after tax dollars, so it is a moot point. Not to mention that she and others are always saying, oh but you won’t be realizing those 401k gains…they never say …losses. You can just as well have saved yourself some more $$$ by taking $$$ out from your account before the market went down.You just don’t know. Bottom line: taking out a 401k loan is a great idea as long as you use it for a specific purpose and don’t get too used to it. and of course be sure you have the fund to pay it back either in bulk (if you get fired and the plan doesn’t allow monthly payments anymore) if you have to cuz you dont want to get swatted with a withdrawl tax + 10%.

By: John

John — Sat, 25 Feb 2012 00:33:45 +0000

I think the best way to explain the missing dollar problem.

30 (10 dollars by each man) = 25 (amount kept by hotel) + 3 (1 dollar for each man) + 2 (kept by the bellboy)

Still trying to wrap my head around the above posts.

By: Billy M.

Billy M. — Fri, 24 Feb 2012 13:37:23 +0000

No. You are incorrect. Only interest incurrs DOUBLE TAXATION if and only if you have traditional (pre-tax) 401k. This will include, company matching, and any pre-tax contributions.

If you have a traditional 401k and you borrow (not withdraw) let’s say 1000$. At that moment you get 1000$. That 1000$ has never been taxed, ever. When you put the money back in, you are putting that 1000$ back in + interest. It’s relative. The interest however is paid with after tax money at your current tax bracket. When you finally retire and start distribution, the interest is then taxed again upon distribution.

However, if you have a Roth 401k, it is not taxed again upon distribution.

Like I mentioned above, you are forced to pay tax at your current tax bracket for the interest. This could mean you are at 25%, or maybe even 35%.

Unless you can get a 0% loan indefinitely, a 401k is the best choice unless it’s for a house, which in that case, I’d prefer you take up their mortgage loan.

Case: Let’s say your account has 60% roth 401k and 40% matching (pretax) contribution by your company.
You still have to pay back the principal + interest for both, but when you retire, 60% is not double taxed, the other 40% is.

By: Matt B

Matt B — Thu, 23 Feb 2012 22:07:37 +0000

This is absolute crap…. There is absolutely double taxation on loan payments back to a 401k.

True, it’s not tax deductible…but you’re making the payments with after-tax dollars. When you withdraw the funds at retirement – the entire balance is taxed, including those after-tax loan payment dollars.

The author threw in a bunch of pointless examples of other types of loans you pay back with after-tax dollars, but it all comes down to the above.

Double taxation on 401k loan PAYMENTS is not a myth.

By: Billy M.

Billy M. — Tue, 21 Feb 2012 22:44:13 +0000

To clarify, I understand that you will end up having to pay the 25% on the 50$, but instead of wanting to, you are now obligated to.

In terms of loans, this is a good type compared to any of the other private bank loans.