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Author: PMcMullenCT Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75649  
Subject: Re: Roth conversion complicated by other factors Date: 2/25/2001 12:42 PM
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The economist might be concerned about "double taxation" when the banker gets taxed on income that business earns. I am not because that's how the economy works. I only care when I get taxed again on any of my money that's already been taxed. That, at least in my mind, is the only "double taxation" that really matters.

Consider that the pretax money in one's 401K will be invested in some investment, and any gains on those investments will be taxable when withdrawn during retirement. If the investment is in stocks, that growth will be taxed and any earnings from bonds will be taxed. Similiarly, if the "investment" is a loan to yourself, the earnings on that investment will be taxed.

If you object to the double taxation of your loan interest, consider that there's really no avoiding the tax, unless you use a tax favored loan such as a home equity loan. If you had instead borrowed from Citibank, you would repay them with after tax money, and your 401K funds would be invested elsewhere, would presumably earn gains, which would be taxed. You'll still pay a tax on gains, the only difference is whether those gains occurred though market investments, or from a loan to yourself.

I agree that one shouldn't make a practice of borrowing from a 401K plan, if you must borrow from somewhere, it might in some circumstances be advantageous to use your 401K funds. If the only alternative is a 15% personal loan from a bank, a 401K loan would probably be a better option.
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