Are 401(k) loans taxed?

Generally, any money you borrow from a 401(k) account is tax exempt. This feature is one of the reasons that - for critical short-term needs - such loans may be a better alternative to hardship withdrawals or high-interest forms of credit. As long as you pay the loan back in a timely matter, the only tax consequence comes from the interest some plans require you pay (though the term "interest" is a bit misleading, as the funds go back into the participant's own account).

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