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This sounds like a very Foolish strategy to me but no one has mentioned this before. So am I missing something here?

As others have noted, borrowing from your tax-deferred plan is a lose-lose for the borrower. When my former firm used to bring in outside consultants to "educate" the employees on the advantages of the firm's retirement plan, they always pointed to this feature as a real bonus. When I would talk to these experts outside of everyone else hearing, they would describe it as a "chump" play. It's included in most plans as an incentive to get people to participate, not because it is a good deal. Unless you are in a true family emergency, and can't borrow money any other way, I would stay away from borrowing from your retirement account. Just an opinion from someone who really doesn't know much about anything.
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