Is 401(k) loan interest taxed twice?

Yes, but only the interest, and only compared with not borrowing at all. Compared with a personal loan, the “double tax” isn’t an extra cost. It’s a smaller version of a cost every loan has.

Where the idea comes from

You repay a 401(k) loan from your paycheck after tax. The money goes into your pre-tax account. When you withdraw it in retirement, it’s taxed as income. So the interest portion of each payment gets taxed on the way in (as part of your pay) and on the way out.

The principal doesn’t. You took it out of the account without paying tax, so paying it back with taxed money just puts you where you started. That part is a wash.

The numbers on a $10,000 loan

Say you borrow $10,000 for five years at 8%, paid monthly, and you’re in the 22% bracket now and in retirement.

• Monthly payment: $202.76
• Total interest over five years: $2,166
• Tax on that interest when you withdraw it, at 22%: about $476

That $476 is the “double tax.” It’s real, and it’s about a fifth of the interest.

Now compare it with a personal loan

Now run the same $10,000 as a personal loan at 11.90% APR, the average banks charged on 24-month personal loans in the Federal Reserve’s August 2026 survey (G.19, released October 7, 2026). Repaid in 60 monthly payments of $221.94 with no origination fee, the interest is $3,316. That’s arithmetic at a published average, not an offer from any lender. You pay it with after-tax money too, and none of it comes back. It all goes to the lender.

$10,000 over 5 years	Interest you pay	Comes back to you	Gone for good
401(k) loan at 8%	$2,166	$2,166, less about $476 tax later	about $476
Personal loan at 11.90% APR, 60 payments	$3,316	$0	$3,316

So the double-tax argument, used as a reason to avoid a 401(k) loan in favor of a personal loan, gets it backwards. On interest alone, the 401(k) loan is far cheaper.

Lost growth is the bigger cost

What the interest comparison leaves out is that the $10,000 isn’t invested while you have it. Your account earns your 8% loan rate on it instead of whatever the market does. If your investments would have returned more than 8%, the loan cost you the difference. If they’d have returned less, the loan came out ahead.

That’s the number the true-cost calculator shows as the growth gap, along with the exit bill if you leave the job early.

Where the tax point does matter

It matters more if you expect a higher tax rate in retirement. On the same loan, the $2,166 of interest taxed at 32% instead of 22% costs about $693 instead of $476. And if you’d otherwise pay cash and leave the account alone, that tax is part of what borrowing costs you.