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Personal Finances / Credit Cards and Consumer Debt


Subject:  Re: Thinking Of Borrowing??? Date:  10/30/2013  5:25 PM
Author:  aj485 Number:  307442 of 313009

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your account without having to pay any taxes, so there's an offsetting tax benefit that you've realized on the amount withdrawn.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When the money is withdrawn, the amount withdrawn is what drives the income taxes, not the source of the money.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.

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