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If you take a early withdraw you will be charged a ten percent penalty if your are under the age of 59-1/2 or younger.

The state may add additional penalties. My state it is 2.5%.

Also when you pay back your 401K plus any interest you will be paying yourself back from the gross portion [already taxed]of your paycheck, meaning that you are paying double tax on 401K due to the fact that they will tax you when you someday take a withdraw after retirement.

401K loans have issues but double taxation is a red herring. The loan was made pre-tax and spent as after tax. Paying back the principal completes the cycle by making after-tax funds pre-tax. There is no double taxation on the loan principal. If you fail to pay back the 401K load, the tax issue is corrected by making the distribution taxable income.

Interest will be double taxed BUT interest on a personal loan is not deductible. It is paid with after tax funds. Returns earned within the 401K are taxable. Again compared to a personal loan the income taxes are the same. Earning within the 401K would have been taxed. It is just that you are paying the funds to yourself.
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