Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Yes but the repayment is taken out of your paycheck after taxes are deducted. When you file the next year, the money that went to repay the loan is seen as income in that year so you are taxed on it, therefore you are being double taxed.
That's not double taxation.
You take a loan. You spend the loan. You have to pay the loan back. You do it with after tax dollars, as you do any other loan. The money from the loan was a boost to your spending, which you must pay back with future earnings.
If you're truly an accountant, you need to brush up a bit.
You take a loan. You spend the loan. You have to pay the loan back. You do it with after tax dollars, as you do any other loan. The money from the loan was a boost to your spending, which you must pay back with future earnings.
If you're truly an accountant, you need to brush up a bit.
If you take out a 401k loan, before the repay money goes in, it is taxed, that is tax one. When you withdraw the money at retirement, it is treated as earnings and taxed again, that is a second tax.
When you take out a bank loan it is not counted as income or taxed as income. A Roth contribution was already taxed, and the repayment goes in after the repayment check is taxed.
If you take out a 401k loan, before the repay money goes in, it is taxed, that is tax one. When I pay my mortgage, it's with after tax dollars. Repaying a 401k loan isn't different. When you withdraw the money at retirement, it is treated as earnings and taxed again, that is a second tax. Roth 401k isn't taxed at retirement. It grows tax free because contributions are post-tax dollars.
When you take out a bank loan it is not counted as income or taxed as income. When you borrow from a Roth 401k, it isn't considered income, its a loan. A Roth contribution was already taxed, of course, its a post tax account and the repayment goes in after the repayment check is taxed. Again, when I pay down my mortgage loan, it's after tax dollars. every other loan is after tax dollars. its repayment of a loan.
If you take out a 401k loan, before the repay money goes in, it is taxed, that is tax one. When you withdraw the money at retirement, it is treated as earnings and taxed again, that is a second tax.
When you take out a bank loan it is not counted as income or taxed as income. A Roth contribution was already taxed, and the repayment goes in after the repayment check is taxed.
Where is that wrong.
Here's how it's wrong:
You're basically stating that if you borrow $10,000 from your 401(k), spend it, and then one year later you pay off the loan by writing a $10k check from your checking account, that that $10k from your bank account is after-tax money so you'll eventually be taxed twice, right?
But, let's say you take out a $10,000 loan from your 401(k) and instead of spending it, you just put it in your bedside nightstand at home. One year later you decide to payback the $10k loan and you take it out of your nightstand, deposit it in your checking account, and then write a check to your 401(k) administrator paying off the loan. Has that $10k magically changed from pre-tax money to after-tax money? Have you now been taxed on this money that you're putting back into the 401(k)? Of course not.
Now how is the first example different from the second example? Answer: It isn't. You've borrowed $10k in both examples and you've returned $10k in both examples. There are no tax consequences at all in either one.
Let me give you another (albeit somewhat ridiculous) example that will make this even clearer. You take out a $10k loan from your 401(k) and put the money in your right pants pocket. This is "pre-tax" money according to you. Now, you withdraw $10k "after-tax" money out of your checking or savings account and put it in your left pants pocket. At the end of one year when you go to pay off the 401(k) loan, does it matter which pocket you use to repay the money? Of course not.
There is only one minor double-taxation issue that arises from borrowing from your 401(k). When you pay back the loan, you also add in the interest the money would have earned had you never taken the loan in the first place. So if your borrow $10,000, you may pay back $10,200 or so. That $200 extra that you put in is after-tax money and will be double-taxed when ultimately withdrawn again. But that's it. The $10,000 principal is not taxed twice.
I hope this has clarified the issue for you.
Last edited by MadManofBethesda; 04-04-2014 at 06:48 AM..
Reason: typo
I think your calculator is wrong, you can withdraw your contributions penalty and tax free, you have already paid taxes on Roth contributions.
The employer match is still put into a traditional account, so you would be charges the 10% penalty and taxes, because your employer has not paid any on those funds.
You can usually contact the administrator online and request to close the account out. Different plans have different options for withdrawing. For mine you can have it wired to an account, or have a physical check mailed to you.
If you contributed $22,000 you can take that amount with no tax or penalty. The other $22,000 would cost you, you can just ask to cash the account out and say that you will handle the taxes yourself. I believe that should be an option but it may vary from plan to plan.
Thanks. Interesting.
Regarding your later post about taxation on removing funds from a ROTH account, are you sure about that? Or were you talking about taking funds out a traditional account, and thus being hit with taxes, and then repaying the funds and facing taxes on the eventual value because it would come out of a traditional account again in retirement? That's an interesting scenario and I'd love to find out more about that. (Just curious, I have no intent to touch my IRAs)
Regarding your later post about taxation on removing funds from a ROTH account, are you sure about that? Or were you talking about taking funds out a traditional account, and thus being hit with taxes, and then repaying the funds and facing taxes on the eventual value because it would come out of a traditional account again in retirement? That's an interesting scenario and I'd love to find out more about that. (Just curious, I have no intent to touch my IRAs)
I was talking about the second example you mentioned. I may have been wrong about the Roth loan being double taxed but I do not think I am, it's just that it is not brought up often so people do not see it as a double tax.
I was positive that it is, but I respect a lot of the post by the two people disagreeing, so I will need to research it further. I am 28 and have only been contributing to a 401k for nine months. I have read my plan book about ten times and done some research, to try to talk my mother out of borrowing from her plan, so I am sure I am correct.
I have also heard a few financial advice"personalities" talk about this double tax.
You have the example right, I am not saying that the initial loan is taxed, which is why people do not see it as double tax, and it is not comparable to a bank loan, because that is never counted as income. Only the repayment of the loan is taxed.
When you pay the 401k loan back it is taxed once, than when you withdraw it as income it is taxed again.
For the Roth it was initially taxed, and the company only allows you to pay it back after taxing your wages (that is the piece I am questionable about).
I also do not proclaim to be superhuman and above being wrong, so as an accountant should, I will trust but verify.
You're basically stating that if you borrow $10,000 from your 401(k), spend it, and then one year later you pay off the loan by writing a $10k check from your checking account, that that $10k from your bank account is after-tax money so you'll eventually be taxed twice, right?
But, let's say you take out a $10,000 loan from your 401(k) and instead of spending it, you just put it in your bedside nightstand at home. One year later you decide to payback the $10k loan and you take it out of your nightstand, deposit it in your checking account, and then write a check to your 401(k) administrator paying off the loan. Has that $10k magically changed from pre-tax money to after-tax money? Have you now been taxed on this money that you're putting back into the 401(k)? Of course not.
Now how is the first example different from the second example? Answer: It isn't. You've borrowed $10k in both examples and you've returned $10k in both examples. There are no tax consequences at all in either one.
Let me give you another (albeit somewhat ridiculous) example that will make this even clearer. You take out a $10k loan from your 401(k) and put the money in your right pants pocket. This is "pre-tax" money according to you. Now, you withdraw $10k "after-tax" money out of your checking or savings account and put it in your left pants pocket. At the end of one year when you go to pay off the 401(k) loan, does it matter which pocket you use to repay the money? Of course not.
There is only one minor double-taxation issue that arises from borrowing from your 401(k). When you pay back the loan, you also add in the interest the money would have earned had you never taken the loan in the first place. So if your borrow $10,000, you may pay back $10,200 or so. That $200 extra that you put in is after-tax money and will be double-taxed when ultimately withdrawn again. But that's it. The $10,000 principal is not taxed twice.
I hope this has clarified the issue for you.
susie ormann plays with words on the double taxation all the time.
technically the part of the loan you borrow is taxed 2x so she can get away saying it but part of the money you earned and pulled out to borrow is never taxed at all so it is a wash.
only the interest you pay is actually taxed 2x.
so if i earned 40k and contributed 20k i paid tax on only the 20k i didn't contribute.
i borrow out the 20k , i now have 20k tax free dollars in hand.
i pay back the 20k with after tax money so effectively i paid taxes 2x on the loan amount. but i offset that with the 20k i have that was tax free and never had taxes paid on it.
it is just a play on words but of course folks do not think it through so we hear the loan is taxed 2x.. they do not think it through to realize at no point on their taxes do they pay 1 penny more in tax whether they took a 401k loan and payed it back or not.
that is pretty scarey for someone with a screen name that has the word accountant in it.
Last edited by mathjak107; 04-05-2014 at 02:14 AM..
When you pay the 401k loan back it is taxed once, than when you withdraw it as income it is taxed again.
Then that is your flaw.
A 401k is taxed when it's withdrawn in retirement.
A Roth 401k is taxed when you contribute, withdrawals in retirement are tax free.
A 401k is pre-tax contributions, taxed at withdrawal.
A Roth 401k is post-tax contributions, tax free at withdrawal.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
This really isn't that complicated.
