Best of Blogs for Week of November 16th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week.

fivecentnickel points out you can now Get Amazon Prime on a Monthly Basis

Vanguard tells us about The 'noise' to avoid: A lesson from the muni non-crisis

Apex continues the series on rentals with Real Estate 101: Managing The Property

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Suze Orman is WRONG about 401k loan Double Taxation

In a recent episode of her show Suze Orman doubled down on her claim that 401k loans are subject to double taxation.  She said that many people had written to her to tell her she is wrong but she arrogantly brushed it off and declared that she's right and everyone else is wrong.   In her stubborn refusal to admit any wrong Suze even condescendingly assumes that anyone arguing against her is just trying to rationalize their own use of 401k loans.  

I'm here to tell you that  Suze is wrong about this pure and simple.   I do not have a 401k loan nor do I plan to take out a 401k loan.

You are not subject to additional taxes and your tax bill does not increase as the result of a 401k loan.

You are not subject to additional taxes and your tax bill does not increase as the result of a 401k loan.

I said that twice cause its important.

There are various explanations on the web about why Suze is wrong and there is no double taxation.  

Note : I'm not saying 401k loans are a good idea in general.  Usually you should avoid taking a 401k loan.    The point I'm making is simply that the 401k loan does not amount to double taxation.  


I think the best way to illustrate how there really isn't any double taxation is to compare the actual taxes paid on a 401k with and without a loan.   If you have double taxation from the 401k  loan then your taxes should be higher right?   It isn't.

Lets look at 2 scenarios:

4% loan rate and 8% investment growth

Let it sit -
I have $25000 in my 401k today.   I do nothing at all and let that money sit in my 401k for the next 25 years.  With annual compound growth of 8% the balance will grow to $171,211.   In 25 years lets say that my marginal tax rate is 20%.   I pay taxes of $34,242.

Take a loan-
 I have $25,000 in my 401k.  I decide to take out a loan for $10,000.   I pay 4% interest and pay back the principal in 1 year.  The other $15,000 sits in the 401k and makes 8% interest for that year.  At the end of the year I've got $15000 x 108% + $10,000 x 104% = $26,600.   After 24 more years of 8% compound annual growth my balance is now $168,675.   In 25 years my marginal rate is 20% so I pay taxes of $33,735.

If I let my money sit it grows at 8% and I end up with $171,211 and a tax bill of $34,242.   If I take out a loan my money grows slightly slower and I lose compound growth after that so I only get $168,675 and a tax bill of $33,735.   In this fairly realistic example I actually end up paying lower taxes in the end due to the 401k loan, simply because borrowing away from my retirement under cuts its growth.

4% loan rate and 4% investment growth

Lets look at another example and assume that the money grows at 4% so its equal to the 401k loan rate.

Lets say I've got $20,000 in my 401k and I'm 55 years old.   I let it sit and it grows at 4% a year.  In 10 years I retire and I've got $29,604.

Instead lets say I take out a $10,000 loan and pay it off at the 4% rate.   At the end of 1 year I pay off the whole loan and then end up with $20,800.   Then after 9 more years I have the same $29,604 balance.  

In both of these cases my actual tax bill is going to be the exact same amount since the 401k balance is exactly the same and will be subject to the same tax.

Why is Suze wrong?

Apparently Suze is just playing a stupid shell game with your dollars.   She claims that since you repay your 401k loan with after tax dollars and then have to pay tax on the 401k after you withdrawal the money that this amounts to double taxation.    But theres a couple big flaws with this logic.  
#1 you have to pay income tax on your income whether or not you have a 401k loan so that money is already taxed no matter.   401k loans don't cause income taxes.
#2 she appears to ignore or at least doesn't mention the loan withdrawal you receive from the 401k.  when you take out a loan you are handed money which has no taxes on it.   So if I borrow $10,000 then immediately turn around and repay that $10,000 then its all untaxed money.   The only out of pocket money here is the interest you pay.  

I'm not the first to write about this and I probably won't be the last as long as Suze stubbornly obstinately sticks to her claim.

Heres at least two other people pointing out how she's wrong: 

The financial buff wrote :  401k Loan Double Taxation Myth
MyMoneyBlog covers it with Double Taxation and the Real Reasons 401(k) Loans Are Bad
and Better Example Against Double-Taxation Of 401(k) Loans




Plus of course the numerous people who apparently wasted their time to send her emails to point out she's wrong.  


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Example $100 / month Grocery Budget for One

In a comment on an old post Surviving on Minimum Wage? : An Example Budget a reader Nightvid challenged me to come up with a $100 / month food budget.    A while ago I did an  Example $5 / day Grocery Budget for One  but that was $150/month.    $100 a month is a bit more of a challenge.   But its still feasible :



Here is an example weekly food shopping list that comes out to $100/month:

1.5 gallon of milk
1 box cereal
1 loaf bread
2 cheese
7 bananas
3 frozen dinner
1 12oz pasta
1 mac n cheese
1 ramen
1 hot dogs
1 hot dog buns
0.5 peanut butter
6 eggs

Total cost is = $98.56 / week

You can throw in another buck or two to buy some condiments once in a while.


This comes out to 2503 calories, 15.1% protein

The example list is heavy on pastas and pretty light on fruits, veges.  Someone could adjust to suit.   You'd want to mix things up as well as I'm sure people don't want to eat the same stuff every week.   I'm sure you can find fault with this shopping list, it isn't necessarily that healthy and I'm sure some people will object to the food choices.   The idea isn't to get the perfect menu, but just to show an example shopping budget for a relatively low cost diet.

The prices are just off Safeway retail prices.  I didn't shop around.  No coupons used.  I used generic store brands across the board.   If you shop around or use coupons or shop for sales you can undoubtedly get cheaper prices on average with some effort.

I'm not saying that you should want to limit your grocery spending to $100/month.  But if money is tight then you could do so.

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Visualizing the "Fiscal Cliff"

An actual cliff.

So we're hearing a lot in the news lately about the so called "fiscal cliff" that the USA is driving towards with the pedal* to the metal.   So what is this "fiscal cliff" all about?    Simply put its the tax changes that are due to take effect in 2013 if congress doesn't act.   The Bush tax cuts will end, the temporary reduction in payroll taxes of 2% of income will end, ATM patches will end (yet again) and some other changes will come as well.   Some of the impact will be in increased taxes and some will be in decreased spending.

How bad is this 'cliff'?    Is the USA going to grind to a halt as our nation plummets down an abyss and then bursts into a fireball when it hits the ground?   Thats how going over a cliff works right?

The Camber of Commerce site has what they call 'A visual Breakdown' of the Fiscal Cliff.   Not exactly the visual I was wanting, but its a start.  They list the different tax and spending changes that are set for 2013.    I count up $384B in tax increases.

How does that amount compare to the federal tax revenue over previous years?

Here is the cliff as I'd visualize it :

This cliff looks more like a weak speed bump to me.

Now I am only looking at the revenue side.  There is also some impact to spending side.   But I think thats even much less dramatic.  Cutting spending from expected $3.7 trillion to a mere $3.6 trillion doesn't seem like much of a big deal.


Photo By Elsie esq.

* edit, fixed a spelling error.  I knew that 'petal to the metal' didn't look right.
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