Quote:
Originally Posted by kv968
Nice analogy, but you didn't take it out quite far enough. I understand what you're saying, but you're not taking into consideration the tax you pay on the money you take out of the 401k when you retire.
1. You borrow $1,000 from your 401k
2. You pay back the $1,000 loan with $1,350 pre-tax since it'll be out of post-tax money(assuming 25% tax bracket and not worrying about the interest)
3. When you take out that $1000 later when you retire you are taxed on it as normal income.
Step #3 is when the double taxation comes into play. You were taxed on that money in step #2 before you paid back the loan with it and now again in step #3 when you take it out in retirement.
The amount in your 401k also changes. Take $1000 dollars out, and that's $1000 less in your 401k until you pay it back.
The alternative scenario is correct though because you're paying the money back with the same money you took out without getting anything for the money. You didn't use it for anything so there's no transfer of goods. For example, you give me 10k and I give it right back to you. I gain nothing from that transaction because I didn't get anything from it. If you give me 10k and I buy something with it, the money's gone, the product or whatever is mine but now I have to come up with 10k to give you. And that 10k will be money I made after taxes were taken out. The only difference in this scenario is you won't be giving that 10k back to me in retirement where it will get taxed again. Although you could if you'd like 
And besides, the desire wouldn't subside with a plasma TV  |
step 2 is incorrect, my 401k loans have been paid with after tax money.
The $1000 principal is not taxed going into 401k. It is paid back with "after tax" money, so their is taxed money inside the 401k.
The $350 interest has been taxed, is inside 401k, and will be taxed on the way out.