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REVEALED: Best Investment During Inflation
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401k Loans Do NOT Cause Double Taxation!
There is a common misconception that taking out a loan from your 401k account will result in double taxation. However, this is not the case, and it’s important to understand the implications of 401k loans before making any assumptions.
When you take out a loan from your 401k account, you are essentially borrowing money from yourself. This means that the loan amount is not considered as income and therefore not subject to income tax. Additionally, the interest that you pay on the loan goes back into your 401k account, so it is not taxed either.
Some people believe that if they are using pre-tax contributions to their 401k, then the loan repayment will be made with after-tax dollars, resulting in double taxation. However, this is not accurate. The loan repayment is made with after-tax dollars, but when you withdraw the funds during retirement, you will only pay taxes on the amount once.
It’s also important to note that 401k loans are different from 401k withdrawals. If you take a withdrawal from your 401k before reaching the age of 59 ½, you may be subject to a 10% early withdrawal penalty in addition to income tax. This is where the confusion may arise regarding double taxation. However, loans from a 401k account do not carry the same penalties and tax implications as early withdrawals.
While 401k loans do not result in double taxation, there are still important factors to consider before taking out a loan from your retirement account. The loan must be repaid within a specified time frame, usually five years, and if you fail to make the payments, the outstanding balance will be treated as a withdrawal and subject to taxes and penalties.
Additionally, borrowing from your 401k may impact the growth of your retirement savings, as the loan amount will no longer be invested in the market. It’s important to carefully weigh the pros and cons of taking a loan from your 401k before making a decision.
In conclusion, 401k loans do not cause double taxation. While there are potential drawbacks to consider, such as the impact on retirement savings and the risk of default, it is important to understand the tax implications of borrowing from a 401k account. If you are considering taking a loan from your 401k, it is advisable to consult with a financial advisor to fully understand the implications and make an informed decision.
YOU GET TAXED TWICE ON A REPAID 401K LOAN !!!!
The requirement that you REPAY the loan with after tax dollars is simple proof that the answer is yes . Upon retirement withdrawing the AFTER TAX ( already taxed once) repayment proceeds gets taxed again .
I swear the IRS is behind all this BS talk of no double taxing !!!
So let me ask this. Let’s forget the loan. If I just put after tax dollars in the 401k and then I’m taxed again, at retirement, that would be double taxation. But we don’t do that, so bring the loan back into the picture, the taxes paid on the money I’m using to pay back the loan, is covering the taxes that we didn’t pay on the loan in the first place? Am I on the right track or way off in the weeds?!!
If you are in the 22% tax bracket your contribution of $10k only cost you $7800k due to the fact that you did not have to pay the 22% tax on the 10k reducing your tax bill by $2200 for the year so when you take out a loan on your 401 you are paying back principal with money that was never taxed .The interest is a different story cost of doing business
Read the rules on the IRS website, you are spot on.
I normally agree with you, Josh. But, I disagree with you here. Taking pre-tax money out for a loan is not new income. It "maintains" its status as pre-tax. So, it can't cancel out the the post-tax pay-back which is then taxed again when you withdraw it in retirement (hence, double-tax). It is always a bad idea to borrow from your 401K, even to pay debt. It's a much better idea to stop contributions temporarily to quickly (2 years or less) pay off "consumer" debt (other than mortgages), and then come back in with higher contributions once the debt is paid off.
Good Stuff
Josh, I think this article is right up your alley. https://www.latimes.com/opinion/op-ed/la-oe-mcgee-retirement-savings-crisis-401k-pensions-20190621-story.html?outputType=amp
Thanks Josh good info one thing I have to consider now being close to retirement (quitting my crappy job) is making sure that there are no outstanding loans on 401, or pension because it changes the payout in a HUGE way.
I'm confused on your logic. It's pretty obvious you are being double taxed to me. I put money in and then pull it out with a loan. That just counters me putting it in in the first place. At that point, it is as if I did not put any money into the 401k at all (because the money is not in the account and no taxes were paid either way). – Now when I pay the loan back I am putting money in that I paid taxes on and then I get taxed on that money once again when I withdraw it. That is double taxation. Just because I pulled money out without paying taxes that I put in without paying taxes, doesn't mean I'm not getting double taxed when the money returns to the account. If I had not taken the loan, that money would have only been taxed once on withdrawal, but since I took the loan, it is now being taxed twice, going in and coming out. Conclusion: taking a loan causes double taxation.
Check out Dark Journalist interview Friday night with Catherine Austin Fitz on utube. Most enlightening financial analysis on the government ever heard. Timely. Enjoy.
Not that I'd ever do it, but what's the repayment term on 401k loans? Like 5 years? Are the terms variable depending on each individuals plan?
What about front loading the 401K?
Partly wrong. You have to pay back the load with interest. The interest you pay is taxed twice. Once when you put it in and once when you withdraw it.
What a out borrowing from 401k to fund a Roth IRA? Is this a good idea??