UnThreaded | Threaded | Whole Thread (16) | Ignore Thread Prev | Next
Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308423  
Subject: Re: Thinking Of Borrowing??? Date: 10/30/2013 5:25 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 12
But you end up paying taxes twice on the money you're putting back into your 401K - you're repaying the 401K loan with after-tax dollars, and once you hit 59.5 and can withdraw, you pay taxes on money you withdraw from your 401K - so you end up paying taxes 2X on that portion of money you borrowed from the 401K.

Double-taxation is a red herring.

You are getting money out of your account without having to pay any taxes, so there's an offsetting tax benefit that you've realized on the amount withdrawn.

Net/net, there is no difference in the income taxes the OP would pay this year whether or not they take out the 401(k) loan. No increase in taxes paid => no double taxation

When the money is withdrawn, the amount withdrawn is what drives the income taxes, not the source of the money. If you are taking more than a required minimum amount, you are choosing the amount to take, so no change in taxes => no double taxation.

If you are only taking out the RMD, so the amount you have to withdraw is being dictated to you, then there is a possibility that you could pay more in taxes:

- If the interest (minus any fees) that you paid when paying back the loan is the same as whatever you would have gained during the same timeframe if you hadn't taken out the loan, there is no change in the RMD, so no change in taxes, up or down.

- If the interest (minus any fees) is less than you would have gained, then you are actually paying less in taxes.

- Only if the interest (minus any fees) is more than you would have gained (like if jeffbrig's wish to have borrowed money in 2008 had occurred) will you end up paying more in taxes than you otherwise would have. However, you will also end up with more money in your pocket after taxes. So, even when paying extra taxes, you end up better off than you would have if you hadn't taken out the loan.

With all that said, it's not a good idea to borrow money out of a 401(k) to pay consumer debt if

(1) you haven't resolved the issues that got you into that consumer debt and

(2) you don't have a contingency plan in place to pay off the 401(k) loan if you leave your job, either voluntarily or involuntarily.

AJ
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (16) | Ignore Thread Prev | Next

Announcements

TMF Credit Center
The Motley Fool Credit Center arms you with real tools and simple messages, that will help you in every credit situation.
Post of the Day:
Berkshire Hathaway

Is the Market Overvalued?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement