In a recent column, I cautioned my readers against cashing in or taking loans from 401(k) accounts or other types of retirement accounts. One of the problems with taking a loan, I said, is the matter of double taxation. And those two words caused a tsunami of mail to wash up on my desk. Some of you just did not understand, while others suggested I don't know what I'm talking about. So I'm going to give this matter of double taxation another shot today, giving full forgiveness in advance for readers who doubted me.

The biggest benefit of a 401(k) or other type of IRS-sanctioned retirement account is that you get to invest pretax dollars. That means if you earn a dollar, you can invest the entire dollar into your plan. So let's say your weekly wages are $1,000 and you are set up to invest $100 into your 401(k) plan. The $100 is deducted and sent to your plan. Now your wages are reduced to $900. Your taxes are based upon $900, not the $1,000 you actually earned. Let's say, for illustration purposes, that your after-tax (take-home) pay is $720 per week, even though you earned $1,000. Are you still with me? Good. Let's proceed.

You've been on the job for a long time, and your 401(k) has grown nicely. You also have $10,000 in credit card debt at 14 percent, and it is really bugging you. So you decide to borrow $10,000 from your 401(k), repayable at 6 percent interest over five years, with monthly payments of $194 that are deducted from your paycheck automatically.

Here comes the first taxation. It is not on the $10,000 that you borrowed, but it's on the money you use to pay it back. The $194 payment each month is taken from your after-tax dollars. That means in order to actually possess $194 in after-tax dollars for your loan payment each month, you will have to earn $248, assuming you are in the 28 percent tax bracket. That is the first taxation.

Suppose you stay on the job for the full five years and pay back the entire $10,000 in after-tax dollars. You will have had to earn $13,890 gross to net the $10,000 required to repay the loan. You don't get to repay loans with pretax dollars.

Here comes the second taxation. When you withdraw that already-taxed $10,000 during retirement after you turn 59.5, you will pay taxes on it again, as you will on all the money in your 401(k) account. So if you are still in the 28 percent tax bracket, you'll pay another $2,800 in taxes on that $10,000, for a total of $6,690 in taxes -- or 48 percent tax -- on that original $13,890 you had to earn to repay the loan. That's the result of double taxation.

Double taxation is only one of the pitfalls of borrowing from a retirement account. And that's why my best advice is to see your retirement accounts as out of reach for now. Don't even think about cashing them in or taking loans from them.

It's just too expensive.

Mary Hunt is the founder of DebtProofLiving.com and author of 17 books, including "Debt-Proof Living." You can e-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723. To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.
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