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For those who practice asset allocation and have a certain percentage of their portfolio in fixed income investments a 401k loan makes perfect sense. I allocate 20% of my 401k to fixed income rather than equity. I include my 401k loan as part of my fixed income investments. In my case the interest I am making on the loan is even better than what I can get from the available fixed income options in my company plan. This sounds like a very Foolish strategy to me but no one has mentioned this before. So am I missing something here?

If I understand correctly, you're taking a loan of 20% of the value of your 401(k) and then repaying that loan, "earning" in the 401(k) the amount of interest that you're paying on the loan. Meanwhile you've plopped the loan proceeds in a taxable interest-bearing account.

If my assumptions are correct, what you're missing 8is that the interest you pay on your 401(k) loan is paid with after-tax money. Once it's in the 401(k), it loses its after-tax status, so when you withdraw it in retirement, you'll pay tax again. If you consider the double tax, are you still better off?

Phil Marti
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