Are 401K loans “taxable income?”?
Loans
Question by rurouni: Are 401K loans “taxable income?”?
We are considering taking a loan from my husband’s 401K, as they just started offering and it would save us 4.7% on our remodel debt from two years ago and allow us to pay off the balance more quickly. The Fidelty website says we have to report that money as “income” and it will be taxed. Everywhere I read online says it will only be taxed (and incur additional penalties) for a distribution or if he is laid off and cannot pay it back immediately (in which case it will be considered a distribution). So, is a 401K loan taxable income? Or is it just that paying it back with after-tax dollars means that money was no longer tax free?
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Loans are never income. It is only income if you do not repay the loan.
It’s not taxable income unless you don’t pay it back as scheduled, then it becomes a distribution and is taxed.
Paying it back with after-tax dollars doesn’t mean it is no longer tax free. The money you put in originally wasn’t taxed, then you took out money and didn’t pay the tax on the loan amount so you don’t get a tax break for paying it back.