I've heard a few people say that taking out a loan against your 401K and repaying it means that you are taxed twice:

  1. You are repaying your loan using after-tax dollars
  2. You are going to be paying a tax on the 401K withdrawal in retirement

And some arguing that's not the case. Which is true: am I being taxed twice or just once?

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    I thought for sure this question would have been asked on money.SE at some point in the past, but I couldn't find it. – stannius Mar 4 '20 at 19:55
  • @stannius, ditto, I did search on money.SE before posting my question and was surprised not to find a QA on this earlier. – Sam Mar 4 '20 at 21:15

All of these answers are correct that the principal payments do not cause double taxation. However, they are incomplete because they do not include an example where you are paying back "interest" on your 401k loan.

401k loans most likely require the borrower to pay a low (currently ~4.5%) interest rate on their 401k loan. The interest portion of your repayment is invested into your 401k. So you are essentially paying interest to yourself.

Double taxation results from

  1. Taking out a 401k loan
  2. Repaying the loan and interest from after tax dollars
  3. Withdrawing the funds (including the after tax interest payments) from the 401k and being required to pay income tax on the entire withdrawal.

With that understanding double taxation does occur for the interest payments on a 401k loan

  • While this was a later answer and hence has fewer upvotes, I believe this is indeed the correct answer due to the nuanced situation: (a) loan repayment is NOT double-taxed (b) interest payments are INDEED double-taxed (even if the actual interest and hence double-tax is a small amount). – Sam Mar 9 '20 at 4:58
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    This answer is correct.... But I don't get why there's a question in the first place. Why do you care that the interest you pay to yourself is taxed rather than a bank just taking all of it. Yes, it's taxed, so the government potentially takes about a third of it, rather than a bank taking 100%.... – xyious Mar 19 '20 at 20:58

If you expand to include all the inflows into and outflows from the 401(k) account, you will see that there is no double taxation:

  1. You contribute from your paycheck. The income is not taxed.
  2. You take a loan. The disbursement is not income and is not taxed.
  3. You earn income which is taxed. You use some of that income to pay back the loan.
  4. You take a distribution after retirement. The distribution is taxable income.

Since you didn't pay any taxes in step 2, you don't avoid any taxes in step 3. The money defers taxes once and is taxed once.


Consider that if you had simply left your 401k alone and taken a loan for the same amount from another source (say, a personal loan from a bank), you'd be paying with post-tax money, as well.

With that in mind, ultimately, taking a loan from your 401k (versus from another source) doesn't impact your total tax liability. In that sense, there is no double taxation.

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    Could you expand this example with some numbers maybe? Also, does this apply to the "interest paid" on the loan? – Nosjack Mar 4 '20 at 22:50
  • @wide.writing.immediately How is the interest not double taxed? It is a new contribution (taxed) which will eventually be distributed from the 401k (taxed) – Nosjack Mar 5 '20 at 21:30
  • @Nosjack Doing more digging, it looks like you are correct about the interest. It is deposited with after-tax dollars, no deduction can be taken when paid, and then taxed again when you take distributions. The loan interest, then, is taxed twice. – wide.writing.immediately Mar 5 '20 at 22:30
  • Loan interest is not taxed twice because the proceeds of the loan are not taxed - just as this answer correctly states. – void_ptr Mar 6 '20 at 16:36
  • @wide.writing.immediately: Re "no deduction can be taken when paid", this assumes that the amount of interest paid would be large enough (or that you'd have other itemizable deductions) that it would be worth itemizing instead of taking the standard deduction. Given current interest rates, I'd be surprised to find that this is true for most people. – jamesqf Mar 6 '20 at 18:17

Imagine if you borrow $100,000 from your 401K and then just use that $100,000 to pay the loan back. You will never have paid any taxes on that $100,000 at any time. So point 1 is nonsense.

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    Funny, sometimes a simple answer illustrates best. I think you nailed it. Even a year out, the (say) $5K interest paid was taxed money, and now taxable 401(k) money. So what? Is OP better off borrowing the $100K at 18% off a credit card at 18%? By the way, $50K is the loan limit. But that's not the issue. – JTP - Apologise to Monica Mar 6 '20 at 10:50

401K loans aren't double taxed, per se, because loans aren't.

Loans are not income generally

What they're overlooking is that when you take a loan, that's not income so you are not taxed on it. Wait, how does that work? How is it not income? It's cash in hand! Well, that's a "cash" way of thinking, and in big accounting, it works that way on the cash flow statement.

However, the IRS taxes people on their income statement. That counts both cash gained and liabilities indebted. So you have +$10,000 cash because of -$10,000 debt you now owe. These two cancel each other out, and you have $0 net income that you have to pay taxes on.

If there's some sort of bonus, e.g. you borrow $10,000 but as a promotion they only require you to pay back $9900, then yeah, that $100 is income. Likewise if you default, the unpaid debt is considered income, but that gets weird.

But 401K loans can result in a kind of double taxation

Now, with a 401K, if you leave the job you must pay the loan back very soon. If you can't, you are forced to make a premature withdrawal from the 401K to settle the loan. That means you need to pay normal income tax on the 401K money (because you never did at time of contribution) and also a 10% premature-withdrawal penalty.

So it's tax + 10% more, not quite a double tax depending on your bracket.

Going onto the unemployment line, does that feel like a great time to repay a large loan? Chuckle, I didn't think so. So usually, the above situation is forced upon you, meaning you accrue a whole bunch of taxes (normal income tax + the 10% penalty) right when you can least afford it. Ouch.

Worse, 401Ks are for retirement. When you default on a 401K loan, you irrevocably rip a chunk out of your retirement savings, and you will have less in retirement. There's no "catch-up" contribution limit to let you regain your lost ground.

Lastly asset protection. 401K investments are fully protected from lawsuit and bankruptcy. If you default on credit cards, the 401K remains intact. From an asset protection POV, you're better off taking the credit report burn and keeping the 401K intact for its purpose: retirement.

For those who think asset protection is cheating creditors, not at all. It just prevents creditors from using force on you. You can always choose to pay it off. Pay minimums, subminimums, or zero until able; each has different effects. Only bankruptcy prevents paying it off later, so don't! I am not recommending bankruptcy, merely noting 401Ks are protected.

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    A 401k loan is not considered a premature withdrawal, and isn't subject to taxes or penalties. It only becomes this if you leave the job and can't repay immediately. – Barmar Mar 5 '20 at 17:05
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    I think the difficulty with this answer is that you're painting a bleak picture to illustrate a point that's not even being asked about in the question (regardless of the truth of your point). Defaulting on any loan is bad - of course - but, effectively, a 401k loan is a loan from yourself. If you default on a 401k loan, your only real burden is the tax penalty of an early withdrawal. Compared to some lending options desperate people may have (i.e. a payday loan) it's really not that bad. – dwizum Mar 5 '20 at 19:58
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    The question is very specifically about the tax implications of 401k loans, not whether they're a good idea in general. You're the one who is generalizing. You also never edited the statement that you say you misphrased. – Barmar Mar 5 '20 at 21:51
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    I respect the fact that you are anti-401(k) loan. And that we often go off on a bit of a tangent when answering many questions. I'm not seeing the main question addressed here even after "But 401K loans can result in a kind of double taxation". If I offered a counter example - "Top X reasons when a 401(k) loan is probably a good idea", it would be voted down as well. This is a tough one. – JTP - Apologise to Monica Mar 6 '20 at 10:47
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    @JTP Because you can't just leap directly to the final answer: "42". You have to lay the groundwork for the answer to be meaningful. Alright. I'll gut half the answer and try to get it down. – Harper - Reinstate Monica Mar 6 '20 at 16:45

Short and sweet answer: The loan amount is not taxed twice, but the interest you pay is definitely double taxed!

Unlike your 401K contributions, the interest you pay on the loan (even though it is going into your own 401K account) is from your "after tax" earnings. Now upon retirement you take money out of your 401k (which includes the interest you paid), it is taxed as normal income, i.e. taxed a second time!


"Double taxation" generally refers to the same money being taxed twice. You are getting taxed twice, but you earned money twice as well. You earned the money you originally put into the 401(k), and you're taxed when you take that out. You earned the money you used to pay the loan back, and you are taxed on that when you earn it. Since money is fungible, I suppose you could label the money in such a way that the "same" money is being taxed twice, but then you would have money that's being taxed never.

  • In the end, any income is taxed eventually. Your last sentence clears up my confusion perfectly, thanks! – Nosjack Mar 10 '20 at 19:01

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