"When that $50,000 leaves the account, it stops compounding inside the 401(k). The interest she pays herself sounds like a workaround, but it is paid with after-tax dollars and then taxed again as ordinary income when she withdraws it in retirement. That is the double-tax quirk of 401(k) loan interest that almost no plan participant has explained to them."
"$50,000 left invested for 15 years at a 7% growth assumption compounds to roughly $138,000 by age 65. The same $50,000, repaid by year five and then invested for the remaining 10 years, lands closer to $98,000. That gap is about $40,000, and it exists even if Sarah does everything else right."
"The quieter damage is the contribution pause. Most borrowers cannot fit the loan repayment and full salary deferrals into the same monthly cash flow, so they cut contributions and forfeit the employer match. A $5,000 annual match missed from age 50 through 54, compounded at 7% to age 65, is roughly another $60,000 of forgone balance."
A 401(k) loan removes $50,000 from the retirement account, stopping compounding for the five-year repayment period. The interest paid back to the account is funded with after-tax dollars and is taxed again as ordinary income when withdrawn in retirement, creating a double-tax effect. The opportunity cost is large: $50,000 invested for 15 years at a 7% growth rate can reach about $138,000, while repaying by year five and reinvesting for the remaining 10 years can reach about $98,000. Missed contributions during repayment can also reduce or eliminate employer matching, which can further lower retirement savings by tens of thousands.
Read at 24/7 Wall St.
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