There is a downside that is big taking out fully a 401k loan that no one covers: taxes. While you have a loan; losing out on the growth your loan money would have enjoyed if it had stayed in the 401k account; and if you lose your job (quit, change jobs, get fired) while you have a loan outstanding, the remaining loan balance is typically due within 60 days if you read an article about the pros and cons of 401k loans, the usual list of cons includes: not being able to make contributions to the plan.
Those are typical good reasons why you should think hard before using away a loan that is 401k. Nevertheless the reason that is biggest to actually avoid these loans, if possible, could be the income tax therapy. You do so with after-tax dollars when you repay your 401k loan. Understand that normal efforts up to a 401k are produced with pre-tax bucks, which can be among the major great things about taking part in a 401k plan. But loan repayments are available with after-tax dollars, generally there is no income tax break here.
What is even even worse though, is the fact that once you sooner or later retire and start money that is withdrawing your 401k in your retirement, all your 401k money–regular efforts and loan repayments–is taxed as ordinary income. This means your loan repayments will be taxed twice: very first at payment as long as you’re working, as soon as once more at your your retirement. That double earnings taxation makes 401k loans very costly!
Now the argument that is typical for taking out fully a 401k loan is the fact that interest is quite reasonable, plus in essence, you might be having to pay your self that cash.