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but since you paid the interest to yourself, rather than to a bank...you're still better off right?
I think that is a mirage also just like the double taxation. I have a TSP which is the fed version of a 401k. If I take a loan I pay interest as if it was invested in the G fund. So either I can loan the money to myself or loan it to the government. I am just replacing what I would have been paid.
There are so many reasons not to tap your 401k for a loan I really don't know why Suze would have to play a word game with her viewers. I know someone who took out a loan to pay off credit card bills and called it "hitting the reset button." Teach people how to reset their brains to enjoy security as much as they enjoy buying things. I think she usually does a pretty good job of that. No need to make up a tax "Boogie Monster."
not really, the interest usually isnt much and you give up the gains you would have gotten on whatever you were invested in.
the interest gets taxed 2x so its not really a good deal.
if you lose your job the loans are due usually in 60 days so the risk is not worth it either .
wawawhat? I'm going to copy and paste from the link I posted.
[SIZE=3][SIZE=3][LEFT]In practice,
however, the double-taxation of loan interest relative to a consumption tax is offset by the
break borrowers get on the timing of their tax payments: recall that rather than paying
taxes on loan proceeds when they are distributed (i.e., consumed), borrowers pay the taxes
gradually over the following five years as they repay the loan with after-tax dollars. The
time value of these delayed tax payments offsets the double taxation of interest—perfectly
so, if the discount rate is the pre-tax rate of return; only partially if the discount rate is[/LEFT]
lower. An algebraic illustration of the taxation of 401(k) loans is provided in Appendix 1.
[/SIZE][/SIZE]
you can do the same thing at the bank and get taxed once. you may gain more on your 401k if it stays invested then the interest at the bank.
I don't think you meant that the way is sounds. The reason you don't get taxed twice on interest you pay to a bank is because it's gone. It actually is possible to readistribute the remaing balance to stay with your target mix. You could even create a macro with your allocations to stay on track. Even I am not anal enough for the last sentence.
i think what makes this confusing is the taxable income is different depending where you pull the loan from.
if you earned 27k in the 25% bracket and put 10k in your 401k with no loan and got 4% interest on your 401k that 4% is taxed once and the prinicpal is taxed once..
total pretax income that is needed is 27k plus taxed on the gains once at withdrawal.
if you took a bank loan and did a 401k contribution the same origonal 27k is taxed . plus the 401k gains at withdrawal.
same effect so far. only 27k taxes plus gains.
if you took a 401k loan you owe tax on the origonal 27k eventually but now need to pay tax on even more income to pay the interest on the 401k to your self.
the 401k loan actually requires more taxable income when all is said and done .
you need the origonal 27k have taxes paid but in addition you need to earn more taxable income to pay back the 401k loan so more taxes wil be paid even though the gains may still be the same on the 401k from the interest you paid..
you may now need 30k in taxable income to cover the same bottom line in the 401k.
this is making my hair hurt lol.
Last edited by mathjak107; 11-19-2012 at 04:01 AM..
Suze insists that taking a 401k loan results in double-taxation of the principal, as one repays tax-exempt money with after-tax money.
But she is using flawed reasoning, and here is why: MONEY is FUNGIBLE.
Do the following thought experiment:
You take out $20k from your savings account (after-tax $$) to buy a car and place it in an envelope.
Then you take out a $20k loan from your 401k, and put that into an identical envelope.
You go buy the car and pay for it with the cash from one of the envelopes, having forgotten which was which.
You then repay the loan with the contents of the OTHER envelope.
NOW, did you repay the loan with pre-tax or post-tax money?
You would never know as there is NO DIFFERENCE.
If you had to pay interest on the loan, say $35, then THAT money will be taxed again when you withdraw it.
What say ye?
Avoid 401K loans like the plague they are and you won't have to think about this.
I JUST SENT THIS EXACT LETTER OFF TO SUSIE.
__________________________________________________ _________________________________________
I saw your show on 401k loans. I agree symantically you are taxed 2x .
But can you point out on the show where you are paying 1 penny in additional tax except on any interest.
The way i see it, to have 10k in my 401k and be able to pay back 10k i need to earn 27k in taxable income in the 25% bracket..
Whether i take a loan or not ,whether i contribute to my 401k or not i will eventually owe taxes on 27k in income..
Even if i borrow from a bank and leave the 10k in my 401k alone i still have to pay taxes on the same 27k.
so you will have to show us at what point our tax bill is any higher taking the money from our 401k then it would be taking it from a bank , our 401k or any other source . in fact if we take no loan at all we still owe the same tax on 27k in income.
while yes technically the money you pay the loan back with is taxed twice the amount you pay in additional taxes is zero, except on any interest where you will be taxed 2x.
Uggh, I hope you didn't send the letter with it spelled "symantically". The correct word is "semantically".
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