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The interest you pay on the loan is a kind of deemed earnings on the borrowed amount. The disadvantage to you of this is the interest you're paying is made with after tax dollars, but it does not create basis in your retirement plan...hence you're being taxed twice on the interest: after tax interest payments and taxed to you as ordinary income upon withdrawal. It does not count as part of your annual contribution limit.

The principal you pay back is also done with after tax dollars that will be taxable in the future to you as ordinary income when you make withdrawals. However, you were able to use pretax dollars for whatever you took out the loan for and did not have to claim the loan as ordinary income, so its a wash.

BruceM
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