One is simply replacing pre-tax dollars that were taken out of the 401(K)and used for some purpose. The benefit is that you get more dollars to work with than if tax had been paid on these dollars to begin with.

You are replacing the dollars with dollars. You may or may not have paid tax on the dollars you are putting back. But even if you did (which is the case for most of us), you are simply replacing the tax free dollars that you borrowed.

So in the end the dollars that you take out of the 401(K)for retirement purposes will be taxed. But taxed only once, just as if they were in there all along and never taken out(borrowed) for some other use.

The interest is double-taxed because you do have to use after-tax money to pay that back. However, the original money you withdrew is allowing you to earn interest on some money that would have otherwise gone to the government in the form of income tax payments, so it’s like an interest free loan of “government tax dollars”. The double-taxation on the interest is really paying back the government for the benefit you received from borrowing “their” tax dollars to spend today.