AUTHOR: BenefitJack on 8/16/2025 FIRST: Neil Imus on 8/17 | RECENT: Brent Wilson on 8/18
Comments
Every individual is unique. The challenge here is multi-faceted. For some, it is about maximizing present value. For others, CIF may be more about avoiding leaving money on the table. (Never heard of "Cash in Fist" before). Myself, we had unique issues (GPO, significant differences in worker and spouse life expectancy, working past SSFRA, etc.), To me, the two most important considerations about Social Security claiming (among many other concerns and considerations):
First, in the past, few people did exactly what you did, seriously consider the different options, including not only "present value", but how you planned to use the money after commencement, other risks of claiming and deferred claiming, and
Second, how Social Security is the only "annuity" available which provides guaranteed, inflation indexed income and a surviving spouse benefit. The first item didn't happen for many Americans in the past (and even today) because they were unable to continue employment (involuntary job loss, illness, care giver, etc.) and they arrived at older age having failed to save enough or secure other sources of income (pension, self-employment income, business ownership, etc.) And, until a decade or so ago, the claiming rules allowed you to start and stop and restart. The second item is for those who have saved, but whose monthly income is not sufficient to cover everyday expenses. It allows individuals to consider using accumulated assets to buy a SS "annuity" by creating an income "bridge" to deferred claiming, whether to SSFRA or to age 70. That strategy allows for more aggressive investing of other assets not used for income replacement and it may be the most effective option for minimizing the risk of a reduced standard of living throughout retirement (especially where inflation rears its ugly head after retirement). One wise sage once told me if you take the time to be informed, "you never make a wrong decision". Sometime in the future, circumstance/fate may suggest you could have done better had you made different choices (Oh! I coulda had a V-8!). But, whatever you chose after informed deliberation, the option you selected was always, always the right one based on what you knew, when. Finally, a recent study just released suggests that there is added value to be gotten by acknowledging and accepting behavioral preferences for early claiming, even at age 62, where the perceived value of those preferences (CIF, for example) outweight clear differences in present value.
Nothing wrong with providing 401k participants access to annuity purchase platform where they can evaluate the many different kinds of guaranteed income products - annuities, GMWB, etc. However, that is not what Vanguard is doing. What they are doing is adding a guaranteed income feature to their target date fund series. That is adding an opaque insurance product to an already opaque investment option - where the same investment option is typically the one selected as the Qualified Default Investment Alternative (QDIA). The QDIA is the investment option used for participants who have no idea how to invest and those who don't want to make investment decisions. So, only the uninformed support embedding a guaranteed income feature (annuity insurance contract) within a target date fund series, such as Vanguard is proposing. Simply, embedding an opaque feature in an already opaque investment option takes advantage of participants who were either defaulted into the TDF or who affirmatively selected the TDF (because they were uncomfortable making investment decisions). By adding the guaranteed income feature, the typical process is to start at age 50, by changing the allocation in the target date fund, to take some of the equity investment and some of the bond investment, and use it to purchase an increment of income guarantee (insurance/annuity). That reallocation continues along the glide path for the next 15 years, such that by the time the individual reaches age 65, 15% – 25% – 33% of all assets have been used to purchase an insurance contract. Because TDF disclosures do not typically include specific detail of the underlying funds, and more importantly, for those who accept the default or select the TDF to avoid investment decision making, even if there are disclosures, few read them. So, what’s wrong with that? First, the embedded guaranteed income feature will be a single form of annuity. By definition, it won’t be best option for everyone in a highly diverse workforce, with highly diverse account balances and needs. Second, given historical take up rates for guaranteed income product, only 5% – 10% will actually annuitize, commence monthly insured/guaranteed payouts. The remainder will forego annuitization, deciding against the guaranteed income/annuity, meaning that they paid insurance premiums for 15 or more years and got nothing for it. Third, the plan investment fiduciary has to decide what option to offer, and there is no way they can identify the one, the very best option, for even a minority of participants who ultimately annuitize … because there is no such very best option. Fourth, fifteen years from now, during the period of incremental purchase, insurers will introduce a number of other forms of guaranteed income, some with superior features or lower fees. However, the plan and the participants are stuck with the annuity already purchased – unless they distribute the annuity to an IRA and the individual goes through the expensive process of a 1035 exchange. Fifth, wary individuals who see the change starting at age 50, and opt out of the TDF, those who accept the default or those who selected the TDF because they didn't feel capable of making investment decisions, they will now have to make other, affirmative investment decisions because plans typically don't have two sets of TDFs. Sixth (and I could go on), any annuity under consideration is already available as an individual annuity in the marketplace, all you have to do is roll over assets to an IRA and make the purchase – so, why would we want employers to make this decision, and stick everyone in a single choice that doesn't meet the needs of the vast majority of participants. So, why would service providers take this action to embed guaranteed income into the target date fund series, it is called increased asset retention, plus more fees, more revenues, more profits.
Here is my solution, based on my 45+ years in corporate employee benefits: Basic concept: (1) Individuals should be responsible for that which is budgetable.
(2) Society should be responsible for that which is not budgetable. Funding what is not budgetable: A national stop loss/reinsurance system with a $25,000 per capita, per year attachment point, where provider charges are limited to either the Medicaid or Medicare allowable for expenses in excess of the attachment point – funded by general revenues from a per capita premium. That is all American citizens, and all non-citizens who are lawfully present, are automatically covered by the stop loss (part of an individual mandate) and each must pay the per capita stop loss/reinsurance premium collected as an income tax (where all the regular income tax rules apply, and where non-payment accumulates with interest). Should be something like $500 a year, or ~$40/person/month (revenue of approximately $200 Billion). Employers and not-for-profits could pay the premium on others behalf if they so chose to. One estimate of cost for stop loss for an employer-sponsored plan: https://ethosbenefits.com/how-much-does-stop-loss-insurance-cost/ Funding What is Budgetable: Each US Citizen, and all lawfully present in the United States are individually responsible for medical expenses up to $25,000 a year. Where individuals purchase insurance, there would be no point of purchase cost sharing (deductibles, copayments, coinsurance) on preventive care and primary care, and individuals could contribute to a Health Savings Account on a tax preferred basis (same rules as today). Coverage could be provided by employer sponsored plans, individual insurance, options available in the public exchange, Medicare, Medicaid, VA (as all are available today) or an individual could post a bond and self-insure. The only difference is that the "individual mandate" applies to all, there are no free riders, and there is a $25,000 cap on covered expenses per year. All are automoatically enrolled in a public exchange coverage default option each November - no free riders. Those who can show other coverage (individual, employer, exchange, Medicare, Medicaid, VA or post a bond) can opt out of the default option. Those who can't show other coverage are covered, and premiums would be paid via income tax withholding (either from wages or estimated). The cost of $25,000 in coverage per year is likely to be less than $1,800 per person, or $150 a month, on average – with age-based, unisex rates, ranging from about $500 a year for a child under age 18, to $5,000 a year for those age 65+ (who are not yet eligible for Medicare). The result is "affordable", universal coverage, where the coverage prior to the attachment point is “equitable” (both vertically and horizontally equitable, treating similarly situated individuals the same, and differently situated individuals differently, proportionately) relative to the anticipated cost. All non-citizens who are not "lawfully present", including those who are here on vacation, or business, as well as those who are here awaiting processing of their claims for asylum, are individually responsible for their own medical needs - other than stabilization per EMTALA. They are not eligible for exchange coverage, Medicare, Medicaid, or Stop Loss. Bottom line, Americans want the best health care coverage YOUR money will buy. And, so long as we let Congress asserts that health care coverage is a right, and so long as Congress has authority to subsidize coverage, by running $1 - $2 Trillion a year in annual deficits, sending the bill to Americans too young to vote and generations unborn, we won't solve this problem. Since Health Reform was signed into law by President Obama, March 23, 2010, we have added $27 Trillion to our national debt.
Thanks. However, the better option for many who need liquidity prior to age 55 or age 59 1/2, would be to borrow from the plan. Done right, plan loans can improve both retirement preparation and household wealth - especially for those term vested who are not yet age 55.
For the last 15 years, the interest rate on plan loans has exceeded the interest rate on almost all bond investments. So, assuming you rebalance your account to the appropriate allocation of assets, the interest you paid on your plan loan was higher than the interest rate on other bond investments offered by your plan - improving your retirement preparation. And, assuming that the plan loan had an interest rate less than the rate you would have paid on a commercial loan (if the commercial loan rate was lower, you would have chosen that, right?), that means that you paid less interest on the liquidity you needed - improving your household wealth.
Take it from a 401k Subject Matter Expert: Loan interest is never double-taxed. Let's start at a different point. When you need liquidity, and you don't have cash lying around, you either borrow from a commercial source or from your 401k. If you borrow from a commercial source, the interest you pay may or may not be tax deductible, depending on the purpose. You certainly don't get that interest back at a later date. You won't borrow from the 401k if the commercial loan provides a better value. And, you won't borrow commercially if the 401k offers a better value. In fact, given all of the credit card debt in America, payday loans, etc., there are many studies that suggest Americans should borrow more from their 401k to retire those debts. So, think of your 401k as the Bank of Sanjib:
Save
Get company match
Invest
Accumulate
Borrow to meet a current need
Adjust your investments as necessary treat the plan loan principal as the fixed income investment it is (fixed rate of interest) so you don't negatively impact your investment returns
Continue to contribute while repaying the loan, rebuilding the account for a future, greater need,
Repeat as necessary, up to and throughout retirement.
Done right, repaid in full, a plan loan will improve both your household wealth and your retirement preparation. First, when you take a loan, it is secured with assets in your 401k. That means that the assets are converted from whatever investment you had into a fixed income investment, like a bond (same as a bank). The fixed income rate of return is the interest rate you pay. So, first step. Because the principal never leaves the plan, it becomes a fixed income investment, you should examine your asset allocation after the loan is made to ensure you haven't deviated from your investment strategy. Second, the interest you pay on your 401k loan may be tax deductible. If the loan is secured with a home mortgage (where interest is otherwise deductible), or starting in 2025 through 2028, new tax code section 6055AA may allow for an "above the line" tax deduction of interest on a loan secured by a lein on a qualified passenger vehicle. Third, unlike the bank, where interest you pay on a bank loan is always taxable income, the taxation of the interest you pay can be either taxable monies when distributed or tax free:
If the loan principal is secured with tax deferred or after tax assets, not Roth, the interest will be taxable income when distributed, but
If the loan principal is secured with Roth assets, the interest may qualify for tax free treatment if distributed after 59 1/2 and 5 years participation in the plan.
But to answer your initial question, the interest isn't double taxed. The interest you pay on the loan is treated the same as it would be for any other loan - it is either tax deductible or it isn't. The interest you receive at distribution is not the same interest. It is treated the same as any other dollar of interest you earned on your 401k investments. The challenge is that most plan sponsors and their recordkeepers think of 401k loans as leakage. Most recordkeepers haven't updated their processing to 21st Century functionality - they still require payroll deduction, which is so 20th Century. Most everyone reading this post already pays at least one bill electronically. Why not your 401k loans?
Thanks for the post. I have three recommendations:
Don't start until you reach age 50 or so,
Perform an individual calculation, and
The target should be at least continuation of the pre-retirement stream of income (take the average over the last three or so calendar years), net after taxes. When we conducted pre-retirement planning seminars, I would create a confidential, individual, early retirement income replacement analysis for each participant - based solely on what I could see in HR/Benefits from their indicative data and benefits - their 401k savings rate, their 401k account balance paid in installments to match RMD (the RBD was age 70 1/2, but the tables go down to folks in their 50's and below), their pension benefit, a guesstimated benefit from Social Security, the cost of retiree medical and retiree life insurance, etc. I leveraged their total rewards statement data as of the end of the prior calendar year (the RSVP authorized me to create the calculation). If they were under age 55, I assumed they would continue their employment until becoming eligible for an immediately payable pension benefit and retiree medical and life. If they were under age 62 (most were), I used the pension plan's level income feature to bridge them until reaching eligibility for SS benefits. Those who had saved/were saving, who had 25 or more years of service and participation in the 401k, were almost all on track for a replacement rate sufficient to squeak by in early retirement. The analysis had many disclaimers - three important ones were:
Inflation in retirement is the Rule of 72 in Reverse - take the inflation rate, divide it into 72, and, that's how many years until the purchasing power of a nominal monthly benefit is halved,
The assumptions were clearly stated as was confirmation that we didn't know any details, that the illustration was intended solely to prompt additional analysis and NOT to be relied upon, and
Because at least one member of the couple would likely live until reaching age 90+, every individual should give some thought to continuing employment long past the earliest date they would be eligible to commence benefits.
Most everyone was age 50+ when they attended the retirement preparation seminar, and many had a goal of retiring at the double nickel (55). Most everyone who attended, kept working and many delayed retirement until the combination of Social Security and their defined benefit pension (without tapping into the 401k plan) was sufficient to maintain their pre-retirement standard of living (stream of net income, after taxes). Today, at that same employer, the benefits remain generous, there is still a pension plan, but, not so much - folks would have to save for 35+ years, and defer retirement to their Social Security Full Retirement Age or later in order to be able to maintain their pre-retirement standard of living (stream of net income, after taxes) using only the pension benefit and Social Security.
Great observation/quote: “No amount of sophistication is going to allay the fact that all knowledge is about the past, and all decisions are about the future.” The corollary to that comes from a danish proverb, which baseball fans often attribute to Yogi Berra, a pro baseball player whose stats put him in the top 10 players of all time (15-time All-Star, 3-time AL MVP, 10-time World Series Champ): "It's tough to make predictions, especially about the future."
Please excuse the delay in my response. No, HSAs are the best for funding - where else can you pay LTC premiums and out of pocket LTC expenses with triple tax preferred dollars? Just as important, the HSA assets are available "along the way and throughout retirement, tax preferred for all IRC 213 qualifying expenses. Where not needed for medical or LTC, they can provide a tax preferred source of retirement income, and, a survivor benefit to named beneficiaries after death."
The only thing more "regressive" than FICA and FICA-Med taxes are the benefits they fund. Social Security and Medicare are VERY progressive, not regressive in the least. There was a cap on FICA-Med wages until removed by President Clinton in 1993. President Clinton recognized the funding shortfall but never got Congress to take action, otherwise. Certainly, some people immensely profited from Social Security’s formula, with highly progressive bend points, with the unfunded 1977 Social Security changes. That was certainly true for the Greatest Generation. Consider Medicare Part A, Part B, Part D and Medicaid. I once calculated what the FICA-Med taxes an individual reaching age 65 in 2021 needed to pay, to qualify for non-contributory, dual eligible, 100% coverage – 40 quarters of FICA-Med contributions of $723.84 during ten years in the 1970’s (plus an additional, equal amount from the employer)! Keep in mind that the estimated monthly premium for Part A coverage in 2021 was $471, so, the cost of Medicare Part A coverage alone could exceed the worker’s FICA-Med contributions in as little as 2 months (actually one month if there is a spouse the same age who did not work for wages). To fill out the comparison, consider that almost all of government funding of Medicare Part B, Medicare Part D, and Medicaid comes from general revenues, and, most of that comes from income taxes – where 40% of American households with income pay NO income taxes, and where half of American households pay only about 3% of income tax revenues (resulting from significant changes to a much more progressive income tax structure in 21st Century compared to the 20th Century). Social Security and Medicare are wealth transfer systems – from higher income to lower income, from younger generations to older generations. So long as Congress can continue to buy votes through changes such as the Social Security Fairness Act, providing benefits to public sector employees who did not pay FICA taxes on their wages, we won't solve the funding deficit,
Comments
Every individual is unique. The challenge here is multi-faceted. For some, it is about maximizing present value. For others, CIF may be more about avoiding leaving money on the table. (Never heard of "Cash in Fist" before). Myself, we had unique issues (GPO, significant differences in worker and spouse life expectancy, working past SSFRA, etc.), To me, the two most important considerations about Social Security claiming (among many other concerns and considerations): First, in the past, few people did exactly what you did, seriously consider the different options, including not only "present value", but how you planned to use the money after commencement, other risks of claiming and deferred claiming, and Second, how Social Security is the only "annuity" available which provides guaranteed, inflation indexed income and a surviving spouse benefit. The first item didn't happen for many Americans in the past (and even today) because they were unable to continue employment (involuntary job loss, illness, care giver, etc.) and they arrived at older age having failed to save enough or secure other sources of income (pension, self-employment income, business ownership, etc.) And, until a decade or so ago, the claiming rules allowed you to start and stop and restart. The second item is for those who have saved, but whose monthly income is not sufficient to cover everyday expenses. It allows individuals to consider using accumulated assets to buy a SS "annuity" by creating an income "bridge" to deferred claiming, whether to SSFRA or to age 70. That strategy allows for more aggressive investing of other assets not used for income replacement and it may be the most effective option for minimizing the risk of a reduced standard of living throughout retirement (especially where inflation rears its ugly head after retirement). One wise sage once told me if you take the time to be informed, "you never make a wrong decision". Sometime in the future, circumstance/fate may suggest you could have done better had you made different choices (Oh! I coulda had a V-8!). But, whatever you chose after informed deliberation, the option you selected was always, always the right one based on what you knew, when. Finally, a recent study just released suggests that there is added value to be gotten by acknowledging and accepting behavioral preferences for early claiming, even at age 62, where the perceived value of those preferences (CIF, for example) outweight clear differences in present value.
Post: Social Security – Why I Chose FRA
Link to comment from December 27, 2025
Nothing wrong with providing 401k participants access to annuity purchase platform where they can evaluate the many different kinds of guaranteed income products - annuities, GMWB, etc. However, that is not what Vanguard is doing. What they are doing is adding a guaranteed income feature to their target date fund series. That is adding an opaque insurance product to an already opaque investment option - where the same investment option is typically the one selected as the Qualified Default Investment Alternative (QDIA). The QDIA is the investment option used for participants who have no idea how to invest and those who don't want to make investment decisions. So, only the uninformed support embedding a guaranteed income feature (annuity insurance contract) within a target date fund series, such as Vanguard is proposing. Simply, embedding an opaque feature in an already opaque investment option takes advantage of participants who were either defaulted into the TDF or who affirmatively selected the TDF (because they were uncomfortable making investment decisions). By adding the guaranteed income feature, the typical process is to start at age 50, by changing the allocation in the target date fund, to take some of the equity investment and some of the bond investment, and use it to purchase an increment of income guarantee (insurance/annuity). That reallocation continues along the glide path for the next 15 years, such that by the time the individual reaches age 65, 15% – 25% – 33% of all assets have been used to purchase an insurance contract. Because TDF disclosures do not typically include specific detail of the underlying funds, and more importantly, for those who accept the default or select the TDF to avoid investment decision making, even if there are disclosures, few read them. So, what’s wrong with that? First, the embedded guaranteed income feature will be a single form of annuity. By definition, it won’t be best option for everyone in a highly diverse workforce, with highly diverse account balances and needs. Second, given historical take up rates for guaranteed income product, only 5% – 10% will actually annuitize, commence monthly insured/guaranteed payouts. The remainder will forego annuitization, deciding against the guaranteed income/annuity, meaning that they paid insurance premiums for 15 or more years and got nothing for it. Third, the plan investment fiduciary has to decide what option to offer, and there is no way they can identify the one, the very best option, for even a minority of participants who ultimately annuitize … because there is no such very best option. Fourth, fifteen years from now, during the period of incremental purchase, insurers will introduce a number of other forms of guaranteed income, some with superior features or lower fees. However, the plan and the participants are stuck with the annuity already purchased – unless they distribute the annuity to an IRA and the individual goes through the expensive process of a 1035 exchange. Fifth, wary individuals who see the change starting at age 50, and opt out of the TDF, those who accept the default or those who selected the TDF because they didn't feel capable of making investment decisions, they will now have to make other, affirmative investment decisions because plans typically don't have two sets of TDFs. Sixth (and I could go on), any annuity under consideration is already available as an individual annuity in the marketplace, all you have to do is roll over assets to an IRA and make the purchase – so, why would we want employers to make this decision, and stick everyone in a single choice that doesn't meet the needs of the vast majority of participants. So, why would service providers take this action to embed guaranteed income into the target date fund series, it is called increased asset retention, plus more fees, more revenues, more profits.
Post: The annuities are coming, the annuities are coming‼️
Link to comment from December 4, 2025
Here is my solution, based on my 45+ years in corporate employee benefits: Basic concept: (1) Individuals should be responsible for that which is budgetable. (2) Society should be responsible for that which is not budgetable. Funding what is not budgetable: A national stop loss/reinsurance system with a $25,000 per capita, per year attachment point, where provider charges are limited to either the Medicaid or Medicare allowable for expenses in excess of the attachment point – funded by general revenues from a per capita premium. That is all American citizens, and all non-citizens who are lawfully present, are automatically covered by the stop loss (part of an individual mandate) and each must pay the per capita stop loss/reinsurance premium collected as an income tax (where all the regular income tax rules apply, and where non-payment accumulates with interest). Should be something like $500 a year, or ~$40/person/month (revenue of approximately $200 Billion). Employers and not-for-profits could pay the premium on others behalf if they so chose to. One estimate of cost for stop loss for an employer-sponsored plan: https://ethosbenefits.com/how-much-does-stop-loss-insurance-cost/ Funding What is Budgetable: Each US Citizen, and all lawfully present in the United States are individually responsible for medical expenses up to $25,000 a year. Where individuals purchase insurance, there would be no point of purchase cost sharing (deductibles, copayments, coinsurance) on preventive care and primary care, and individuals could contribute to a Health Savings Account on a tax preferred basis (same rules as today). Coverage could be provided by employer sponsored plans, individual insurance, options available in the public exchange, Medicare, Medicaid, VA (as all are available today) or an individual could post a bond and self-insure. The only difference is that the "individual mandate" applies to all, there are no free riders, and there is a $25,000 cap on covered expenses per year. All are automoatically enrolled in a public exchange coverage default option each November - no free riders. Those who can show other coverage (individual, employer, exchange, Medicare, Medicaid, VA or post a bond) can opt out of the default option. Those who can't show other coverage are covered, and premiums would be paid via income tax withholding (either from wages or estimated). The cost of $25,000 in coverage per year is likely to be less than $1,800 per person, or $150 a month, on average – with age-based, unisex rates, ranging from about $500 a year for a child under age 18, to $5,000 a year for those age 65+ (who are not yet eligible for Medicare). The result is "affordable", universal coverage, where the coverage prior to the attachment point is “equitable” (both vertically and horizontally equitable, treating similarly situated individuals the same, and differently situated individuals differently, proportionately) relative to the anticipated cost. All non-citizens who are not "lawfully present", including those who are here on vacation, or business, as well as those who are here awaiting processing of their claims for asylum, are individually responsible for their own medical needs - other than stabilization per EMTALA. They are not eligible for exchange coverage, Medicare, Medicaid, or Stop Loss. Bottom line, Americans want the best health care coverage YOUR money will buy. And, so long as we let Congress asserts that health care coverage is a right, and so long as Congress has authority to subsidize coverage, by running $1 - $2 Trillion a year in annual deficits, sending the bill to Americans too young to vote and generations unborn, we won't solve this problem. Since Health Reform was signed into law by President Obama, March 23, 2010, we have added $27 Trillion to our national debt.
Post: About those US medical costs….
Link to comment from November 18, 2025
Thanks. However, the better option for many who need liquidity prior to age 55 or age 59 1/2, would be to borrow from the plan. Done right, plan loans can improve both retirement preparation and household wealth - especially for those term vested who are not yet age 55.
Post: Rule of 55: Early Retirement
Link to comment from November 18, 2025
For the last 15 years, the interest rate on plan loans has exceeded the interest rate on almost all bond investments. So, assuming you rebalance your account to the appropriate allocation of assets, the interest you paid on your plan loan was higher than the interest rate on other bond investments offered by your plan - improving your retirement preparation. And, assuming that the plan loan had an interest rate less than the rate you would have paid on a commercial loan (if the commercial loan rate was lower, you would have chosen that, right?), that means that you paid less interest on the liquidity you needed - improving your household wealth.
Post: Logic Check: 401(k) Loan – Paying Taxes Twice?
Link to comment from November 9, 2025
Take it from a 401k Subject Matter Expert: Loan interest is never double-taxed. Let's start at a different point. When you need liquidity, and you don't have cash lying around, you either borrow from a commercial source or from your 401k. If you borrow from a commercial source, the interest you pay may or may not be tax deductible, depending on the purpose. You certainly don't get that interest back at a later date. You won't borrow from the 401k if the commercial loan provides a better value. And, you won't borrow commercially if the 401k offers a better value. In fact, given all of the credit card debt in America, payday loans, etc., there are many studies that suggest Americans should borrow more from their 401k to retire those debts. So, think of your 401k as the Bank of Sanjib:
- Save
- Get company match
- Invest
- Accumulate
- Borrow to meet a current need
- Adjust your investments as necessary treat the plan loan principal as the fixed income investment it is (fixed rate of interest) so you don't negatively impact your investment returns
- Continue to contribute while repaying the loan, rebuilding the account for a future, greater need,
- Repeat as necessary, up to and throughout retirement.
Done right, repaid in full, a plan loan will improve both your household wealth and your retirement preparation. First, when you take a loan, it is secured with assets in your 401k. That means that the assets are converted from whatever investment you had into a fixed income investment, like a bond (same as a bank). The fixed income rate of return is the interest rate you pay. So, first step. Because the principal never leaves the plan, it becomes a fixed income investment, you should examine your asset allocation after the loan is made to ensure you haven't deviated from your investment strategy. Second, the interest you pay on your 401k loan may be tax deductible. If the loan is secured with a home mortgage (where interest is otherwise deductible), or starting in 2025 through 2028, new tax code section 6055AA may allow for an "above the line" tax deduction of interest on a loan secured by a lein on a qualified passenger vehicle. Third, unlike the bank, where interest you pay on a bank loan is always taxable income, the taxation of the interest you pay can be either taxable monies when distributed or tax free:- If the loan principal is secured with tax deferred or after tax assets, not Roth, the interest will be taxable income when distributed, but
- If the loan principal is secured with Roth assets, the interest may qualify for tax free treatment if distributed after 59 1/2 and 5 years participation in the plan.
But to answer your initial question, the interest isn't double taxed. The interest you pay on the loan is treated the same as it would be for any other loan - it is either tax deductible or it isn't. The interest you receive at distribution is not the same interest. It is treated the same as any other dollar of interest you earned on your 401k investments. The challenge is that most plan sponsors and their recordkeepers think of 401k loans as leakage. Most recordkeepers haven't updated their processing to 21st Century functionality - they still require payroll deduction, which is so 20th Century. Most everyone reading this post already pays at least one bill electronically. Why not your 401k loans?Post: Logic Check: 401(k) Loan – Paying Taxes Twice?
Link to comment from November 9, 2025
Thanks for the post. I have three recommendations: Don't start until you reach age 50 or so, Perform an individual calculation, and The target should be at least continuation of the pre-retirement stream of income (take the average over the last three or so calendar years), net after taxes. When we conducted pre-retirement planning seminars, I would create a confidential, individual, early retirement income replacement analysis for each participant - based solely on what I could see in HR/Benefits from their indicative data and benefits - their 401k savings rate, their 401k account balance paid in installments to match RMD (the RBD was age 70 1/2, but the tables go down to folks in their 50's and below), their pension benefit, a guesstimated benefit from Social Security, the cost of retiree medical and retiree life insurance, etc. I leveraged their total rewards statement data as of the end of the prior calendar year (the RSVP authorized me to create the calculation). If they were under age 55, I assumed they would continue their employment until becoming eligible for an immediately payable pension benefit and retiree medical and life. If they were under age 62 (most were), I used the pension plan's level income feature to bridge them until reaching eligibility for SS benefits. Those who had saved/were saving, who had 25 or more years of service and participation in the 401k, were almost all on track for a replacement rate sufficient to squeak by in early retirement. The analysis had many disclaimers - three important ones were:
- Inflation in retirement is the Rule of 72 in Reverse - take the inflation rate, divide it into 72, and, that's how many years until the purchasing power of a nominal monthly benefit is halved,
- The assumptions were clearly stated as was confirmation that we didn't know any details, that the illustration was intended solely to prompt additional analysis and NOT to be relied upon, and
- Because at least one member of the couple would likely live until reaching age 90+, every individual should give some thought to continuing employment long past the earliest date they would be eligible to commence benefits.
Most everyone was age 50+ when they attended the retirement preparation seminar, and many had a goal of retiring at the double nickel (55). Most everyone who attended, kept working and many delayed retirement until the combination of Social Security and their defined benefit pension (without tapping into the 401k plan) was sufficient to maintain their pre-retirement standard of living (stream of net income, after taxes). Today, at that same employer, the benefits remain generous, there is still a pension plan, but, not so much - folks would have to save for 35+ years, and defer retirement to their Social Security Full Retirement Age or later in order to be able to maintain their pre-retirement standard of living (stream of net income, after taxes) using only the pension benefit and Social Security.Post: Retirement Income Goals: Bottom Up Beats Top-Down
Link to comment from October 11, 2025
Great observation/quote: “No amount of sophistication is going to allay the fact that all knowledge is about the past, and all decisions are about the future.” The corollary to that comes from a danish proverb, which baseball fans often attribute to Yogi Berra, a pro baseball player whose stats put him in the top 10 players of all time (15-time All-Star, 3-time AL MVP, 10-time World Series Champ): "It's tough to make predictions, especially about the future."
Post: Navigating the Unknowns of Financial Decisions
Link to comment from September 13, 2025
Please excuse the delay in my response. No, HSAs are the best for funding - where else can you pay LTC premiums and out of pocket LTC expenses with triple tax preferred dollars? Just as important, the HSA assets are available "along the way and throughout retirement, tax preferred for all IRC 213 qualifying expenses. Where not needed for medical or LTC, they can provide a tax preferred source of retirement income, and, a survivor benefit to named beneficiaries after death."
Post: How Are You Planning to Pay for Potential Long Term Care Expenses?
Link to comment from September 6, 2025
The only thing more "regressive" than FICA and FICA-Med taxes are the benefits they fund. Social Security and Medicare are VERY progressive, not regressive in the least. There was a cap on FICA-Med wages until removed by President Clinton in 1993. President Clinton recognized the funding shortfall but never got Congress to take action, otherwise. Certainly, some people immensely profited from Social Security’s formula, with highly progressive bend points, with the unfunded 1977 Social Security changes. That was certainly true for the Greatest Generation. Consider Medicare Part A, Part B, Part D and Medicaid. I once calculated what the FICA-Med taxes an individual reaching age 65 in 2021 needed to pay, to qualify for non-contributory, dual eligible, 100% coverage – 40 quarters of FICA-Med contributions of $723.84 during ten years in the 1970’s (plus an additional, equal amount from the employer)! Keep in mind that the estimated monthly premium for Part A coverage in 2021 was $471, so, the cost of Medicare Part A coverage alone could exceed the worker’s FICA-Med contributions in as little as 2 months (actually one month if there is a spouse the same age who did not work for wages). To fill out the comparison, consider that almost all of government funding of Medicare Part B, Medicare Part D, and Medicaid comes from general revenues, and, most of that comes from income taxes – where 40% of American households with income pay NO income taxes, and where half of American households pay only about 3% of income tax revenues (resulting from significant changes to a much more progressive income tax structure in 21st Century compared to the 20th Century). Social Security and Medicare are wealth transfer systems – from higher income to lower income, from younger generations to older generations. So long as Congress can continue to buy votes through changes such as the Social Security Fairness Act, providing benefits to public sector employees who did not pay FICA taxes on their wages, we won't solve the funding deficit,
Post: Does Social Security work?
Link to comment from August 30, 2025