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URL:  http://boards.fool.com/the-double-taxation-on-401k-interest-payments-30835354.aspx

Subject:  Re: Borrowing from your 401(k) Date:  8/21/2013  3:28 AM
Author:  aj485 Number:  307219 of 308687

The double taxation on 401K interest payments makes this less desirable.

Double-taxation on interest is a red herring. Taxes are based on income. Taking out the loan has no impact on your taxable income. Paying interest on the loan has no effect on your taxable income. So, you pay no more (or less) in income taxes than if you didn't take out the loan, all else being equal. Similarly, you pay no more or less in taxes is paid in any year you pay interest on the loan.

While technically, you will pay taxes again on the same money at withdrawal, if you would have withdrawn the same amount whether the additional money was in there or not, there is no change to your taxes, so again, no extra taxes are paid. If RMDs force you to take more out of the account since the balance is higher because of the additional money that was put in - you will still end up with more in your pocket than if you hadn't had to pay those taxes, at least until we get to a marginal 100% tax rate. Even at the top Federal tax rate of 39.6%, plus the Medicare unearned inocome tax of 3.8% plus the top state tax rate (CA) of 10.3%, you get to a maximum marginal tax rate of 53.7%. (And you would have to be earning $1,000,000 in taxable income in CA (in retirement) for those rates to kick in. Evem so, you would still have an additional 46.3¢ out of every extra dollar you were forced to withdraw because of RMDs. So, net-net, you would not end up being worse off because of 'double-taxation'.

Because you don't end up being worse off due to 'double-taxation' on interest, it's a red herring.

AJ
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