401k loan

[Anonymous]

Want to get some input on this...

I'd like to reduce my taxable income but still depend on my salary as my main source of income. Would it make sense if I maxed out my 401k contributions and then in turn take a 401k loan to pay for bills, necessities, etc.? I would of course pay it back with interest, which would ultimately increase my balance. I get the concept of double-taxing, because repayments are made using post-taxed dollars and then taxed again in the future when I withdraw. But is it significant? Has anyone tried this?

[Revelate]

Sounds like you are losing 25% or whatever of money to taxes anyway by doing this?  Future compounding benefits lost too?  

Seems like bad math.

If you need the money to live that is more important than trying to reduce your AGI by over contributing to your 401K.

You can always boost your income with a side hustle anyway to be able to contribute more and that is probably the better option for all that I just kicked my own absurdly lucrative side gig to the curb today.  

[iced]

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@Anonymous wrote:

Want to get some input on this...

I'd like to reduce my taxable income but still depend on my salary as my main source of income. Would it make sense if I maxed out my 401k contributions and then in turn take a 401k loan to pay for bills, necessities, etc.? I would of course pay it back with interest, which would ultimately increase my balance. I get the concept of double-taxing, because repayments are made using post-taxed dollars and then taxed again in the future when I withdraw. But is it significant? Has anyone tried this?

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If the goal is to take advantag of pre-tax money (that is, to spend money that wasn't taxed) this won't do it. Every penny you ever make, with few exceptions (HSA spent on qualifying medical expenses being the big one), will be taxed at least once. As Revelate pointed out, you will pay it back with after-tax money plus interest, wiping out those gains.

If the goal is to artifically drop your AGI for tax favorability/bracket dropping, be careful you don't get audited. This type of loophole exploiting is the kind of thing that the IRS would love to make an example out of you on. Also, many employers require some reason/justification for a 401k loan, and if you're making them regularly it's going to draw attention.

[Anonymous]

Appreciate the insight! Someone told me about this approach and I wasn't easily convinced. Seemed like there was more to it.  A side hustle seems like the better route.  Now to explore those options!