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Does anyone know if the interest you pay on a 401k loan counts towards your annual contribution limit?

No, of course not. Because you're not contributing to the plan, you're repaying a loan.

Keep in mind that some 401k plans limit your ability to make actual contributions to the plan after you take a plan loan. If that causes you to miss out on employer matching contributions, you're unlikely to come out ahead.

Remember the idea is to get OTHER people to pay you for the use of your money. Not to get you to pay you for the use of your money. So while you have the plan loan outstanding, the money is not invested and is not generating a return from other people/businesses.

Now you're going to tell me that you'll take the loan proceeds and invest them yourself. And from those investment earnings, you'll repay the loan. If you can do that, do it with something other than your 401k money. When you've beaten the returns on your 401k plan for 5 years running with something other than luck**, then you'll be ready to try this strategy. But by then, you'll already have a boatload of money in your investment account and you really won't feel like tapping into your 401k money.

Also, you don't get to set an artificially high interest rate. The plan will determine the interest rate. So you can't stuff extra money into the plan by charging yourself a very high interest rate.

--Peter


** Luck is something like having one stock that has such a big gain it wipes out all of the losses on your other 9 picks.
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