re: 401k loan question

quote:

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My gut says pay the balance and get back that $300 each month.

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Not true at all.

You're paying interest to yourself when you take out a 401K loan. So, in a sense you're not losing money or making money on that loan. You're just paying back yourself.

The PROBLEM is the taxes. When you are paying interest every paycheck, you are basically putting in after-tax dollars into a 401K that will come out eventually as ordinary income. ALL OF IT.

If you were to invest that money in stock, you would eventually be taking out any investment gains as capital gains taxed at a lower rate.

So, for example, let's say that over the course of the loan, you pay yourself $10,000 in interest payments. When you take that money out of the 401K (or IRA if you roll it over), the entire $10,000 will be taxed as ordinary income. And, THIS IS AFTER TAX DOLLARS THAT YOU PAID.

On the other hand, if you just put that $10,000 in stock over the next 17 years, you wouldn't pay anything on the $10K when you eventually sell and all the gain on that $10K will be capital gains.