If you understand the reality of how taxes work, feelings don’t matter. The numbers do. And the numbers say that you aren’t paying any more or less in taxes than if you hadn’t taken out the loan.
Nope. You cannot roll over after-tax money from an IRA into your 401(k)* and after-tax contributions from your paycheck are kept in a separate sub-account which cannot be rolled over into a Traditional IRA - the after-tax contributions can either rolled into a Roth account within your 401(k), rolled directly into a Roth IRA, or paid out to you directly. So after-tax money in a 401(k) doesn’t complicate your taxes at all.
Earnings on after tax money can be converted to Roth (if you want to pay the taxes) or rolled into a Traditional IRA.
*This is actually a way to separate any after-tax contributions out of pre-tax contributions and earnings in your IRA - roll all of the pre-tax money into your 401(k), and then immediately convert the remainder (consisting of after-tax contributions) over into a Roth IRA. So if you have after-tax contributions in an IRA this will actually greatly simplify your future taxes by avoiding pro-rata distributions.
This paper is older than the one I quoted. I suspect that 401k loans have become more popular as the years go by, and as more people become aware that such loans exist. Also, this study appears to be different because their dataset is “people who left employment” rather than “active plan participants”. And interestingly enough, it has a similar result for defaults after leaving employment. Here is the salient numbers from the study you posted -
Approximately one-fifth (20%) of active participants had a loan outstanding from their 401(k) plan in any given year, averaged over our three-year observation period. Each year, an average of 11.9% of participants with a loan outstanding terminated employment; about 80% of those terminating employment with a loan, or 9.6% of 401(k) borrowers, defaulted on their loan at job termination.
So each year 11.9% of people with a loan in progress terminated employment, and 80% of them defaulted. That’s very close to the numbers from the later study.
This must be something relatively new in tax law. I remember, a few decades ago, declining to add after-tax money to my 401k because it would result in paperwork complexity to track it. This new law is MUCH better because it essentially gives you instant access to your post-tax 401k contributions as necessary (assuming >59.5, etc is met).
In looking at the authors, it looks like the one I found is actually the pre-cursor paper to the one you found. That said, I will point out that your graph shows that the 37% you quoted is the percent of active participants who had a loan at any time over 5 years, not the default rate. The default rate for all borrowers is 10%.
It became possible when 401(k)s were allowed to offer Roth accounts, which started in 2010. However, your plan had to allow it, and there weren’t a lot of plans that did so until the IRS issued a ruling in 2014 Notice 2014-54 Allows After-Tax 401k Roth Conversions (kitces.com) Now it’s known as the “Mega Backdoor Roth” strategy.
But am I remembering correctly that you had to track the post-tax basis all along, and then when withdrawing, you had to apportion each withdrawal proportionately? In other words, you couldn’t say in early years of withdrawals that “I am taking ONLY post-tax money this year, so no tax due”. It is possible that I am misremembering (that happens to me more and more as time goes by …) I tried looking it up, but unfortunately couldn’t find much about 401k tax law before any recent (after early 2000s) tax law changes.
Your administrator should be doing that. They should calculate how much was taxable vs. not when they issued your 1099-R.
If you wanted access to the entire amount of already taxed money, you could roll over the rest of the 401(k) to an IRA, and get the already taxed money distributed to you without it being taxed. In 1996, that’s what happened when I rolled my 401(k) into an IRA - they sent me two checks - one made out to Vanguard FBO aj485’s IRA that was all the pre-tax money and one made out to me that was only the after-tax contributions.
But if you wanted to leave the money in the 401(k), you are correct: you weren’t allowed to take partial distributions of only after-tax money. That said - your administrator should have been tracking the pro-rata distribution allocation for you.