Don't forget: the $1,000 401k loan was TAX FREE money. As we all know, the government doesn't like giving you tax free money! So you have to pay the tax on it, you just do it when repaying the loan. It works out exactly the same as if you had just grossed $1,350 to net $1,000.
Now, to make things even more confusing: the INTEREST that you pay yourself IS taxed twice. This is because you "pay yourself" interest with after tax dollars. And the interest will be taxed when you withdraw it in retirement - but at least it got 20+ years of tax deferred growth!
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