I don't think it's fair to compare interest you're paying yourself with dividends from an investment. The latter is an external source of money, which is generally taxed. The former is money that's moving from one part of the balance sheet to another. Under normal circumstances, that's not taxed. Whatever you want to call it, I don't think there's any doubt that with an expected investment return of zero (to separate out the opportunity cost) and a non-zero interest rate on the loan, you will end up with less money than you started with.But it isn't a contribution but rather earnings on the loan amount and the earnings whether left in the plan or taken out as a loan would be pretax so the fact you paid the earnings rather than mutual funds earning dividends is irrelevant.I'm not sure I agree with this perspective. It is double taxation when compared to a normal contribution, and
As a comparison, say someone takes a "loan" from their savings account, also with an expected return of zero. They make payments with interest (after-tax) back into the savings account. No tax will be generated regardless of the interest rate, and they will have exactly the same amount of wealth with or without the loan. So this is better than with the 401k loan. Even if the savings account pays interest, only the interest (an external source of money) gets taxed. No tax is owed when the "loan" interest hits the savings account, nor when it's later withdrawn. This is what most people mean when they say "double taxation."
I suggest you don't get hung up on the nomenclature and look at the numbers instead. Do you see any issues with the effective interest rate calculation?
Statistics: Posted by fyre4ce — Wed Apr 17, 2024 2:07 am — Replies 6 — Views 891