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It all depends on how you look at it. And the way I view it, your answer is totally incorrect.

The "interest" you pay yourself on the loan is paid with after-tax or already taxed dollars. That "interest" is considered earnings in the plan. When withdrawals start, that "interest" will be taxed again.

That's true, in a way, but suppose you took out a loan from Citibank instead. You'd pay your own tax on income, then the interest payments to Citibank would be taxable as income for Citibank. For that matter, every dollar you spend is double taxed - taxed as your income when earned by you, and then taxed again when it generates profit for a business when you purchase goods or services. The same thing happens with your 401K, as the loan generates income for your retirement account, much the same as if it were invested in stocks or bonds.

It seemed it was being claimed that the entire loan payment was being double taxed. Perhaps I misunderstood.
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