Who gets the interest on a 401(k) loan?

But where does the 401(k) loan interest go? Fortunately, when you repay your 401(k) loan, the interest goes back into your 401(k) account. Rather than being lost to a bank, you keep the interest you pay on your 401(k) loan to build until you retire.

How does interest on 401k work?

Essentially, compounding interest is the act of reinvesting the interest your 401(k) has earned back into your investments. Then that growth earns additional interest the following year. Each year, the growth your 401(k) has earned gets reinvested and continues to compound on top of each other.

Is there interest on a 401k loan?

Interest Rates

Like most loans (except maybe those from Mom and Dad), a 401(k) loan comes with interest. The rate is usually a point or two above the prime rate. Right now, the prime rate sits at 5.5%, so your 401(k) loan rate will come out between 6.5% and 7.5%.

What is the downside of borrowing from your 401k?

A 401(k) loan has some key disadvantages, however. While you’ll pay yourself back, one major drawback is you’re still removing money from your retirement account that is growing tax-free. And the less money in your plan, the less money that grows over time.

Is it better to borrow from 401k or bank?

The interest rate on 401(k) loans tends to be relatively low, perhaps one or two points above the prime rate, which is less than many consumers would pay for a personal loan. Also, unlike a traditional loan, the interest doesn’t go to the bank or another commercial lender, it goes to you.

Where do 401k loan payments go?

Any interest charged on the outstanding loan balance is repaid by the participant into the participant’s own 401(k) account, so technically, this also is a transfer from one of your pockets to another, not a borrowing expense or loss.

Do you have to claim a 401k loan on your taxes?

Any money borrowed from a 401(k) account is tax-exempt, as long as you pay back the loan on time. And you’re paying the interest to yourself, not to a bank. You do not have to claim a 401(k) loan on your tax return.