Comments on: 401k Loan: The Double Taxation Myth

By: Max

Max — Wed, 23 Apr 2008 08:35:40 +0000

Found your blog on yahoo – thanks for the article but i still don’t get it.

By: dingbat007

dingbat007 — Sun, 30 Dec 2007 05:18:20 +0000

I have heard that double taxation statement before. Never understood the logic of it. But certain finance people spout it of like it is a fact. Any loan I take I pay back with after tax dollars including the home loans. At least with a home loan it basically lowers my interest rate by my marginal tax rate which is 32%.
For every dollar I pay in interest I get 32 cents back at the end of the year. (Every dollar over my standard deduction for you nerds)

As for loss of furture profits…maybe, a little. Maybe not at all. Depends on the market and how YOU would have invested it. Not some hypothetical scenerio. The loan rate you pay is probably based off of a fund you already own. Something with a guaranteed rate or a bond fund. You can let someone else borrow your money at 5% or you can do it. Provided you change your account distribution to reflect the loan as holding the place for the fund with the low volitity.
Example 50,000 balance
10,000 loan
80 % stock fund 20% treasury (loan)
Do it to save 2% on a car loan, probably not. Do it to pay back high interest blood suckers. Yes.

As far as losing your job and not paying it back. Your probably not going to roll it all over anyway now are you?

By: Sean

Sean — Fri, 30 Nov 2007 01:56:28 +0000

If you take a loan out of your 401k and you lose your job, you will be forced to pay all of the money back at once in 60 days. If you don’t, you will have to pay federal and state income taxes and a 10% early withdrawal penalty.

I would only consider a 401k loan if I had the cash to pay it back — but then I would have to figure out if I’m better off just paying cash. Like I said above, it depends on whether your payments are reinvested right away, (a detail I’m not sure of), and the interest rate on the traditional loan, (which obviously doesn’t apply if I’m going to pay cash).

If you have a Roth IRA you can make an early withdrawal with no penalty to make a down payment on your first house.

As for your second question, you pay yourself interest.

By: JB @ GetRichOrDieTrying

JB @ GetRichOrDieTrying — Thu, 29 Nov 2007 13:49:27 +0000

Thanks for the analysis. I’ve thought about taking a loan out of a 401K for a first home down payment. What are your thoughts on that? Also, who gets the interest on your 401K loan? Your brokerage?