Ok... Think of it this way... If you had left the money in the 401K it would have earned taxable income from its investments so when you loaned yourself the money you had to pay interest to the 401K because they invested in you so the interest that you paid is just like the other taxable earnings it made from other investments. They are treated the same so when you do take a distribution from the 401K it's all taxable what you put in and the earnings.
