Quote:
Originally Posted by kv968
You pay the loan back with post-tax money and then you get taxed again when you take it out. Maybe I'm missing something, but how is that not some form of "double-taxation"?  Please explain. |
Well, you are forgetting that the money loaned to you was TAX FREE. I'll try to explain, but it seems most people have difficulty understanding this.
Imagine you want to spend $1,000 on a plasma TV. You have two options (assume 25% tax bracket):
1. Make $1,350 dollars resulting in ~$1,000 after taxes. Buy TV.
2. Take out 401k loan for $1,000. Buy TV. Repay 401k by making $1,350 pre-tax dollars.
Either way, you must make $1,350 pre-tax dollars to pay for a $1,000 after tax dollar expense. Also, in both scenarios your 401k balance does not change.
Alternatively, consider the scenario in which you borrow $1,000 from your 401k to buy a TV. Being the frugal person you are, you decide to wait a week and see if your desire subsides
After a week you decide you don't need the TV, and repay the $1,000 401k loan. You incurred no extra taxes by doing this.