I could be wrong, but I think the $ you borrow will be taxed twice. You’re paying back with after tax $. When you withdraw later, it’ll be taxed again.
Although I agree that borrowing from a 401k when it is down is not a great idea unless the payoff is good (which it might be in this case). You can forget that double taxation issue as it is a red herring (see below**). The only important conisderation is whether the loan is a good investment from your 401k’s point of view in terms of return and whether taking the loan will reduce the overall rate you are paying on debt service.
** This “double taxation” issue is overepmhasized by many, including financial advisors and diverts attention from the important points to consider (above).
Here’s why :
Suppose you don’t borrow from the 401k. Those dollars that you were going to pay the loan back with are taxed anyway.
Example to illustrate:
Case 1 – You borrow $10,000 from your 401k at 6% and pay back the loan with after tax dollars about $200 per month (This $200 is taxed). If your 401k made less than 6% on other investments your 401k came out ahead by making the loan. If you used the $10,000 proceeds to pay off a debt at a higher interest rate you come out ahead (or if you use it to improve your overall effective interest rate on your debt).
Case 2 – You don’t borrow from your 401k. The $200 you are not paying against the loan is taxed anyway.
SO, whether you take the loan from the 401k or not, the dollars you have to either allocate to paying that loan or other things is taxed regardless.
Although, the dollars literally placed in the 401k when taking a 401k loan are taxed twice. It does not result in overall increased tax paid by the individual.
