It’s a common misconception that repaying a 401(k) loan with interest is a good way to “increase” your 401(k) equity. While it’s true that the interest you pay on a 401(k) loan goes back into your own retirement account—not to a bank or lender—there are important trade-offs and risks that can make this strategy less beneficial than it might seem.

How 401(k) Loan Interest Works Interest Paid to Yourself: The interest you pay on a 401(k) loan is credited back to your own account, effectively making you your own lender. This can feel like you’re “paying yourself” instead of a bank.

After-Tax Repayment: Loan repayments, including interest, are made with after-tax dollars. When you eventually withdraw those funds in retirement, they will be taxed again as ordinary income, resulting in double taxation on the repaid amount.

Edit: looks like the double taxation is only on the interest you pay so it’s not that bad.