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Do you have equity in a primary residence? What is your interest rate there? How much additional cash do you have sitting around? If you include the cash, what is your asset allocation, it's obviously lower than 91/9 you say your 401k is.

unnamedone said:   Market return is not risk free but the interest saved from your mortgage is (as in the rate of return is certain). This comes down to your personal risk preference. If you fully understand the consequences (losing the potential market gain, double taxation of the interest, and the possibly of losing your job) and still want to do it as a way of getting out of the stock market, then go for it.

I personally share the same sentiment about the market right now. You just have to look around and ask yourself if the current market situation is as good as early 2007.


Double taxation of the interest, what?

depalma13 said:   unnamedone said:   Market return is not risk free but the interest saved from your mortgage is (as in the rate of return is certain). This comes down to your personal risk preference. If you fully understand the consequences (losing the potential market gain, double taxation of the interest, and the possibly of losing your job) and still want to do it as a way of getting out of the stock market, then go for it.

I personally share the same sentiment about the market right now. You just have to look around and ask yourself if the current market situation is as good as early 2007.


Double taxation of the interest, what?


You pay the interest with after-tax money. When you make distribution, you pay tax again.

unnamedone said:   depalma13 said:   Double taxation of the interest, what?

You pay the interest with after-tax money. When you make distribution, you pay tax again.

Exactly the same effect if you borrowed from an outside source and your 401k had an equivalent return from investment.
What double taxation?

I would stay away from a 401K loan unless it was a real desperate last resort option. Maybe I am just not investment savvy enough but I would not chance it.

unnamedone said:   You pay the interest with after-tax money. When you make distribution, you pay tax again.

That's a myth.

unnamedone said:   depalma13 said:   unnamedone said:   Market return is not risk free but the interest saved from your mortgage is (as in the rate of return is certain). This comes down to your personal risk preference. If you fully understand the consequences (losing the potential market gain, double taxation of the interest, and the possibly of losing your job) and still want to do it as a way of getting out of the stock market, then go for it.

I personally share the same sentiment about the market right now. You just have to look around and ask yourself if the current market situation is as good as early 2007.


Double taxation of the interest, what?


You pay the interest with after-tax money. When you make distribution, you pay tax again.


This is lesson one on intermediate finances: What you said is not true. Please research.

I like the folks who gleefully pay off their sub-5.5% tax deductible mortgages.

Then come to me at financial aid time desperately seeking how to avoid the 5.6% bite financial aid assesses on their assets.

Sneetches. Beaches. Much.

uutxs said:   unnamedone said:   depalma13 said:   Double taxation of the interest, what?

You pay the interest with after-tax money. When you make distribution, you pay tax again.

Exactly the same effect if you borrowed from an outside source and your 401k had an equivalent return from investment.
What double taxation?


Okay. But using OP as an example, if he "borrows" from his cash account at the same rate instead, he wouldn't have to pay tax on the "interest" to himself. Am I still missing something?

You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

dl73 said:   You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

It's a myth, he's not correct.

depalma13 said:   dl73 said:   You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

It's a myth, he's not correct.


Take an example $10k 401k loan, we agree there is no double taxation on that $10k principal you pay back. That is often the myth. But you also contribute into your 401k an additional $700 (for example) in loan interest on top of the $10k, for a total of $10,700. This additional $700 is after tax and isn't tax deductible like the other $10k was. This money is again taxed at withdrawal. So double taxation on the interest, as he said. If the IRS allowed you to deduct the extra 401k loan interest being contributed then you'd be right.

dl73 said:   depalma13 said:   dl73 said:   You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

It's a myth, he's not correct.


Take an example $10k 401k loan, we agree there is no double taxation on that $10k principal you pay back. That is often the myth. But you also contribute into your 401k an additional $700 (for example) in loan interest on top of the $10k, for a total of $10,700. This additional $700 is after tax and isn't tax deductible like the other $10k was. This money is again taxed at withdrawal. So double taxation on the interest, as he said. If the IRS allowed you to deduct the extra 401k loan interest being contributed then you'd be right.

That is all fine. The point is, how is the taxation any different if, you had taken the 10k loan from your bank, at the same terms as the 401k loan, and the 10k that now stays in the 401k earns the same $700 from whatever it is invested in.

Your $700 interest to the bank is still made from after tax dollars. The $700 earnings in the 401k will still be taxed when it is taken out.

uutxs said:   dl73 said:   depalma13 said:   dl73 said:   You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

It's a myth, he's not correct.


Take an example $10k 401k loan, we agree there is no double taxation on that $10k principal you pay back. That is often the myth. But you also contribute into your 401k an additional $700 (for example) in loan interest on top of the $10k, for a total of $10,700. This additional $700 is after tax and isn't tax deductible like the other $10k was. This money is again taxed at withdrawal. So double taxation on the interest, as he said. If the IRS allowed you to deduct the extra 401k loan interest being contributed then you'd be right.

That is all fine. The point is, how is the taxation any different if, you had taken the 10k loan from your bank, at the same terms as the 401k loan, and the 10k that now stays in the 401k earns the same $700 from whatever it is invested in.

Your $700 interest to the bank is still made from after tax dollars. The $700 earnings in the 401k will still be taxed when it is taken out.


There is no myth here, just different perspectives of the same thing. Rather you want to call it double taxation or not, the bottom line is you will pay interest with after-tax money and you will pay tax again when you make distribution. The example you mentioned is just a scenario to justify the tax code. If looking at a 401k loan that way helps you sleep better at night, then go for it.

Let's look at a different example. Let's say you and a friend went out for lunch. You two ordered the same food and ended up with the same bill. Instead of paying your own bill, you paid each other's bill. A month later, you repay each other plus some interest. Now you have to pay tax for the interest collected. Does this scenario justify you should pay tax every time you pay your bills?

unnamedone said:   uutxs said:   dl73 said:   depalma13 said:   dl73 said:   You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

It's a myth, he's not correct.


Take an example $10k 401k loan, we agree there is no double taxation on that $10k principal you pay back. That is often the myth. But you also contribute into your 401k an additional $700 (for example) in loan interest on top of the $10k, for a total of $10,700. This additional $700 is after tax and isn't tax deductible like the other $10k was. This money is again taxed at withdrawal. So double taxation on the interest, as he said. If the IRS allowed you to deduct the extra 401k loan interest being contributed then you'd be right.

That is all fine. The point is, how is the taxation any different if, you had taken the 10k loan from your bank, at the same terms as the 401k loan, and the 10k that now stays in the 401k earns the same $700 from whatever it is invested in.

Your $700 interest to the bank is still made from after tax dollars. The $700 earnings in the 401k will still be taxed when it is taken out.


There is no myth here, just different perspectives of the same thing. Rather you want to call it double taxation or not, the bottom line is you will pay interest with after-tax money and you will pay tax again when you make distribution. The example you mentioned is just a scenario to justify the tax code. If looking at a 401k loan that way helps you sleep better at night, then go for it.

If the net effect is the same, why label one scenario (401k loan) double taxation but not the other (bank loan). That is where the myth is.

The situation with double taxation is where you borrow from a pretax 401k - the loan interst is not deductible (except possibly in the rare situation where you have basis in the 401k), but the interest paid into the 401k will be taxed on distribution. Compare this case to a Roth 401k loan and now you avoid the double tax on interest - no deduction now, but no tax later.

uutxs said:   If the net effect is the same, why label one scenario (401k loan) double taxation but not the other (bank loan). That is where the myth is.

If I understand correctly you made a hypothetical argument that assumes the money left in your 401k earns something identical to the interest you pay a bank (loan) during the loan period, having the same net tax effect when the loan is said and done. What if your 401k doesn't earn anything? What if it earns much more? I guess I don't see the point of making that argument when in practice it will likely never have the same net effect.

dl73 said:   uutxs said:   If the net effect is the same, why label one scenario (401k loan) double taxation but not the other (bank loan). That is where the myth is.

If I understand correctly you made a hypothetical argument that assumes the money left in your 401k earns something identical to the interest you pay a bank (loan) during the loan period, having the same net tax effect when the loan is said and done. What if your 401k doesn't earn anything? What if it earns much more? I guess I don't see the point of making that argument when in practice it will likely never have the same net effect.

Whatever the 401k is invested in and whatever it earns as a result is taxed as income upon withdrawal. We all agree on that. For the duration of the 401k loan, a portion of the 401k is "invested" in your loan. You made that choice when you borrowed from the 401k. Only thing is earnings due to the 401k on that investment is coming from you. That doesnt and shouldnt change the way it is taxed --- it will be just as any other earnings.

Say you had taken that loan from a bank, which in turn sold the note to the 401k custodian as part of investing your 401k funds. Would it be any different --- other than the bank as a middleman?

ETA: Put differently, the tax treatment of earnings within the 401k is not different regardless of the source of that earning. If the dollar amount of that earning is different for two two different investments, of course the dollar amount of tax owed will be different (when said earning is withdrawn).
This is no different than saying someone who makes 100k in salary pays a different dollar amount in tax than a person making say 105k (all other things being equal).

uutxs said:   unnamedone said:   uutxs said:   dl73 said:   depalma13 said:   dl73 said:   You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

It's a myth, he's not correct.


Take an example $10k 401k loan, we agree there is no double taxation on that $10k principal you pay back. That is often the myth. But you also contribute into your 401k an additional $700 (for example) in loan interest on top of the $10k, for a total of $10,700. This additional $700 is after tax and isn't tax deductible like the other $10k was. This money is again taxed at withdrawal. So double taxation on the interest, as he said. If the IRS allowed you to deduct the extra 401k loan interest being contributed then you'd be right.

That is all fine. The point is, how is the taxation any different if, you had taken the 10k loan from your bank, at the same terms as the 401k loan, and the 10k that now stays in the 401k earns the same $700 from whatever it is invested in.

Your $700 interest to the bank is still made from after tax dollars. The $700 earnings in the 401k will still be taxed when it is taken out.


There is no myth here, just different perspectives of the same thing. Rather you want to call it double taxation or not, the bottom line is you will pay interest with after-tax money and you will pay tax again when you make distribution. The example you mentioned is just a scenario to justify the tax code. If looking at a 401k loan that way helps you sleep better at night, then go for it.

If the net effect is the same, why label one scenario (401k loan) double taxation but not the other (bank loan). That is where the myth is.


Because you are not borrowing your own money with a bank loan. Maybe you look at it differently, but I consider a 401k loan as a loan to self. Just like you would borrow from your emergency fund, the extra you put back in (if any) is not considered as interest earned.

And again, how you look at it doesn't change how it works. It's like arguing whether the cup is half full or half empty.

unnamedone said:   uutxs said:   unnamedone said:   uutxs said:   dl73 said:   depalma13 said:   dl73 said:   You guys need to more carefully read what unnamedone said. He said you pay taxes twice on the interest, not the principal. He is correct.

It's a myth, he's not correct.


Take an example $10k 401k loan, we agree there is no double taxation on that $10k principal you pay back. That is often the myth. But you also contribute into your 401k an additional $700 (for example) in loan interest on top of the $10k, for a total of $10,700. This additional $700 is after tax and isn't tax deductible like the other $10k was. This money is again taxed at withdrawal. So double taxation on the interest, as he said. If the IRS allowed you to deduct the extra 401k loan interest being contributed then you'd be right.

That is all fine. The point is, how is the taxation any different if, you had taken the 10k loan from your bank, at the same terms as the 401k loan, and the 10k that now stays in the 401k earns the same $700 from whatever it is invested in.

Your $700 interest to the bank is still made from after tax dollars. The $700 earnings in the 401k will still be taxed when it is taken out.


There is no myth here, just different perspectives of the same thing. Rather you want to call it double taxation or not, the bottom line is you will pay interest with after-tax money and you will pay tax again when you make distribution. The example you mentioned is just a scenario to justify the tax code. If looking at a 401k loan that way helps you sleep better at night, then go for it.

If the net effect is the same, why label one scenario (401k loan) double taxation but not the other (bank loan). That is where the myth is.


Because you are not borrowing your own money with a bank loan. Maybe you look at it differently, but I consider a 401k loan as a loan to self. Just like you would borrow from your emergency fund, the extra you put back in (if any) is not considered as interest earned.

And again, how you look at it doesn't change how it works. It's like arguing whether the cup is half full or half empty.

You can consider it and describe the loan anyway you like.
Is your tax obligation any different in the two situations. If not, dont label one as more sinister than the other.

Half full and half empty are equivalent.
Double taxation and no double taxation are not.



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