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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.
Matthjak...THANK YOU!
I have been going crazy over this and thought I was alone.
I wrote her also, but she is stubbornly resistant.
I don't know why as she is pretty spot on about a lot of other things.
And sorry if i have rehashed an old, well-worn subject, but I never saw it discussed before.
I JUST SENT THIS EXACT LETTER OFF TO SUSIE.
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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.
Wait a second - is this what you mean:
The money you repay may be taxed TWICE, but the 401k money you borrowed and spent IS NEVER taxed.
So it is a wash and there is no net difference in the taxed you pay!
She is twisting everything around so in effect if you owe taxes on 20k in income and put 10k of that 20k you earned in the 401k and borrowed it out effectively your paying the taxes 2x on the 10k to equal the taxes due on 20k.
she is purposely focusing in on the 2 x 10k being taxed so it sounds awful and you wont borrow from your 401k.
she is purposely avoiding bringing up at any point that although the 10k gets taxed 2 times we are really looking at 20k in income that gets taxed regardless of what you do with it.
pulling out the 10k thats never taxed in the loan has the 10k you put back taxed 2x to compensate.
its really a wash but sssssshhhhhhhhhhh the audience isnt supposed to know that or ask the question about whether the taxes stay the same.
its funny her show brought that up yesterday as so many must have told her she is wrong through the years . i listened to her very carefully and realized what she was saying left her correct. but she wasnt being up front about the overall effect being a wash, only the part that made her correct.
no one evr asked her the correct question i guess. which is are my taxes any higher at any point?.
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