Ask the Hammer: Is a 401(k) Loan Double Taxed?

Robert Powell, CFP®

Do you have a 401(k) loan? Does it seem as if you're being taxed twice? You contributed to your 401(k) with pre-tax money and pay the loan back with after-tax money and then withdrawals are taxed as ordinary income later on. That can't be right or is it?

Well, the short answer is yes but, says Jeffrey Levine, Director of Advanced Planning at Buckingham Wealth Partners.

In this episode of Ask the Hammer, Levine says you're also getting a double tax break. You contributed to your 401(k) with pre-tax dollars and you didn't have to pay any tax on the loan. You are, in effect, spending tax-free dollars that lowered your taxable income. "The bad news is it's not a free ride," says Levine. 

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