Borrowing from your 401K?

[mathjak107]

Suzie orman used to tell a white lie by saying you pay back a 401k with after tax money twice .

In a way she is right but she is so wrong overall

The real deal is that just imagine you borrowed 25k from your 401k in untaxed money , decided you didn’t need it and put it back .

You are not taxed twice .

If you didn’t put it back but spent it and put it back from a pay check it is merely switching pockets and you are not taxed twice as you took out untaxed money .

You are taxed twice on any interest paid .

Suzy got away with it because technically you are paying it back with after tax money from your check and then being taxed again when withdrawn .

But the net effect is a wash because you did take out untaxed money to use in the loan .

Suzy would scare her band of financial misfits that way.

A 401 k can be the most expensive loan you can take as the assets are liquidated for the loan .

It can cost you the gains you are not getting .

Plus leave the company or get let go and the loan is due.

I made that mistake in the 1980s …I took a loan and the company I worked for was taken over by another company .

My loan had to be paid back or taxed

 

[jazz4cash]

Yes I recall the false idea circulating that the entire loan proceeds were taxed twice and Suzie being one of the sources. I dug into the issue because I had decided to use 401k loans as a major component of funding college expenses for 3 dependents. I realized that only the “interest” is taxed twice. I also understood the opportunity cost issue so I always adjusted my AA so the loan proceeds came out of my fixed allocation. I kept the loans small and paid them off early. These really should not be called loans at all and many people get confused/enamored with the idea of paying interest to yourself.

Edit: Some plans do not require repayment at separation so that is something to check on to avoid surprises.