Reply to Explain to me why it's a bad idea to borrow against your 401k?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]Another thing - the money you first put into the 401k is before-tax money.   You have to re-pay the loan with after-tax money.   That's a big hit, depending on your income tax rate.  [/quote]

A very good point.  So for every 10,000 you loan yourself, you have to repay somewhere in the ballpark of $12,500.  And that's before any interest charged.  Not a good deal.  [/quote]

I don't really understand what you are trying to say.  I don't have to pay income tax on the amount I borrow from my 401k, so why does it matter if the amounts in there were pre-tax or not, as long as I repay whatever I borrow.  [/quote]

My statement wasn't really clear - it should read, for every $10,000 you put in, you have to effectively use $12,500 (depending on your tax rate) to pay it back.

Say you put $10,000, pre tax, into your account, and then borrow it.  (For purposes of this example, ignore investment gains or interest.)  You do not repay it with pre-tax dollars - you pay tax on your income, and THEN use that income to repay the loan.  So say you pay it back all at once, a lump sum of $10,000 - your account is exactly where it was when you started, with $10,000 in it.  But instead of paying $10,000 pre-tax into the account, you have paid $10,000 post-tax, so you have to add the tax you paid on the loan repayment as a sunk costs of funding the 401k.  I guessed that is about 25%, all in, but it may be more or less.

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