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Thread: Information about taking a loan against TSP

  1. Default Information about taking a loan against TSP

    It's not what I want to do or have happen, but I need infromation about the pro's & con's of taking a loan out against my TSP account. 21 years in and only 7 more possible. Any help will be greatly appreciated. Thank You.


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  3. #2

    Join Date
    Apr 2008
    Location
    Mississippi
    Posts
    2,045

    Default Re: Information about taking a loan against TSP

    HI,

    Several people have done this over the past year for various reasons, one of which was to fund a Roth. You might try searching the threads/posts for "TSP loan".

    Check Show-Me's thread. I know the information is out there, sorry I can't be of more help with listing the threads.

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  5. #3

    Default Re: Information about taking a loan against TSP

    ppl have been saying not to get a tsp loan, but I disagree. I did it and I can tell you that the current apr is about 4.4% and it does not effect your credit score because you actually use your own money. When you pay the interest on the loan, you actually pay to self. Yes, you pay back with after-tax money, and you pay tax again when you retire. But if you get the personal loan from a bank, you pay the bank 10+% interest with the after-tax money and your credit score probably drops. If you get the tsp loan, you should try to pay off as soon as possible. Also, you can log into tsp.gov and click on the loan link to find out how much you can borrow and how long it takes to pay off. You can pay off or refinance the loan anytime at tsp.gov.

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  7. #4

    Join Date
    Sep 2004
    Location
    Missouri
    Posts
    8,619

    Arrow Re: Information about taking a loan against TSP

    Quote Originally Posted by RCTXAN View Post
    It's not what I want to do or have happen, but I need infromation about the pro's & con's of taking a loan out against my TSP account. 21 years in and only 7 more possible. Any help will be greatly appreciated. Thank You.

    RCTXAN,

    Welcome to the MB. It depends on your unique situation and reason for the loan. If you are using it to go on a vacation I would not do it. If you have a small amount of credit card debt with high interest rate that is killing your budget I would only recommend it if you cut up the credit cards first and make a pledge to yourself not to use credit cards.

    Using it to buy a Roth CD at 6% yes, no high risk investments for you with 7 years to go. No individual stock or high risk ETF's. You need to be conservative and pay down debt before you retire.

    TSP loan cost $50 and the interest rate is the G fund rate that is paid back to your account. It must me paid off before you separate from your government employment or you will get nailed from the money that you have not paid back. This include penalties and taxes.
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."

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  9. Default Re: Information about taking a loan against TSP

    Thank You All for the information. The loan may be used to salvage and attempt to keep intact what has been built over time (a payoff all around)!

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  11. #6

    Default Re: Information about taking a loan against TSP


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  13. #7

    Join Date
    Oct 2007
    Location
    Occoquan, VA
    Posts
    2,423

    Default Re: Information about taking a loan against TSP

    By the way, there is no grace period on a TSP loan, you immediately start making payments on it.
    "All the prophets of Doom, Can always find room, In a world full of worry and fear..." - Protest Song, Monty Python

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  15. Default Re: Information about taking a loan against TSP

    Probably the biggest "con" to taking a loan against your TSP is the loss of potential earnings the money would have made had you left it in the account. Given the current state of the market, I am sure you'll get a number of different opinions. Some may say that it is actually preserving your capital to some degree since the markets are generally in a decline while others will staunchly defend the position that you are loosing a lot of potential gain by having that money "out of play.

    My personal opinion, though I am no expert by any stretch of the imagination, is if the loan is relatively small and is going for a good cause, and other sources of money are not viable or available, then it may very well be justified if the gain from taking a TSP loan outweighs the potential loss of gains while the money is out of the market. On the other hand if the loan is for something frivolous or something where other conventional financing could reasonably be used, even if it is at a higher interest rate, then it probably is not be the wisest move. One of the key things to consider for anyone contemplating a TSP loan is the money in your account and the money it earns will likely be a large part of what generates your retirement income unless you have other significant investments in addition to your TSP.

    With only about 7 years left in gov't service starting to reduce your exposure to volatile market conditions should be considered since your horizon to recover from a major or even moderate loss is quite short. This being said, you should examine how much money you are considering taking out versus what that same amount could potentially grow to if you leave it in your account for the next 7 years based on your prevailing investment strategy and contribution allocations. The hardest part is trying to speculate on what the market will do.

    I don't think there are any simple answers to your question as it all depends on how much money you are considering borrowing, how much you have in your account, your investment goals, your current and future investment strategies and the biggest unknown, what the markets will do in the next 7 years or even the next few months for that matter.

    For what it is worth, I personally think we are likely to see generally declining markets for a year to 18 months more or less, with periodic short term rallies like we saw last week. I feel there are probably still a lot of corrections the markets need to make in a number of sectors foremost of which are the financial and housing sectors. I think there is also a lot of bad debt and investments’ hiding out there that need to be purged which makes it tough to say what may happen in the near term. I do, however, believe we'll see the markets get back on track once all this occurs, maybe not to the degree we enjoyed in recent years but at least there will, (hopefully), be reasonable growth and realistic positive gains. It would be nice to think we’ve finally learned that “bubble” economics is not a good strategy or sustainable market condition.

    Anyway, I would suggest you continue your research, gather as much advice and information as you can, try and sort it out and then determine what you are comfortable with.

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  17. #9

    Join Date
    Sep 2004
    Location
    Missouri
    Posts
    8,619

    Arrow Re: Information about taking a loan against TSP

    http://finance.yahoo.com/focus-retir...etirement-401k

    For the new folks, TSP is for us a 401(k). Same rules apply.

    Why You Should Avoid 401(k) Loans
    Borrowing from your 401(k) will likely make it harder for you to meet your financial goals. Because you're taking money out of the market, you'll miss out on the gains you would have benefited from otherwise. A few readers wrote me noting that the interest rate that their 401(k) earns from the loan now approaches 10%, which is a competitive rate of return relative to the stock market's historical gains. But it would be a mistake to call that repaid interest a "gain." Because borrowers pay themselves interest, they're merely shifting money from one pocket to another.
    It also may be more difficult to maintain your current contribution rate when you've got to pay back your loan at the same time. If you end up cutting back, you'll end up retiring with a smaller account. And keep in mind that relatively small amounts really add up over time. Let's say you contribute $1,000 less to your 401(k) this year. If stocks average a 10% annual return, that $1,000 would have turned into $17,450 over the next 30 years.
    Moreover, you could run into some serious trouble if you lose your job or change employers. That's exactly what happened to a friend of mine, who borrowed from her 401(k) account to put a down payment on a house. Soon after, she lost her job. Her plan, like many others, required her to pay back her loan in full within 60 days of leaving her company. Out of work and now with a mortgage to pay, she couldn't handle the full balance. As a result, she defaulted on her 401(k) loan, meaning she had to pay taxes on her loan balance on top of the 10% penalty for early withdrawal.
    Had my friend kept her job, her decision to borrow from her 401(k) might've looked better. If the value of her new home rose more quickly than the stock market and more than made up for the costs of borrowing, then she'd appear pretty smart. But the problem is that there's no way of guaranteeing that would happen. In the end, she's using her retirement savings to speculate on real estate prices. The recent slowdown in home prices is one reminder why that's not a good idea.
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."


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  19. #10

    Default Re: Information about taking a loan against TSP

    Like everything else in life, the right answer is it depends. I took out a TSP Home loan recently so I can tell you about the factors that influenced my decision.

    1. We found an anxious seller and got a really good deal on the house we bought. Two other similar houses in the area sold earlier the month we closed for $105-$110/sqft. We paid $93/sqft. Thats a 'return' of over 13% from the start.
    2. I was not confident in where the market would go for (at least) the rest of the year. I ran several scenarios estimating different market profiles and when the associated break even would be. Roughly the markets would have to return several years of 8-10% just to break even in less than 4-5 years. Anyone confident in that happening?
    3. The interest rate was on par with the tax shielded mortgage rates. (Remember that TSP home loans are not tax deductible!)
    4. I 'only' have 29 more years until I retire. My risk tolerance is fairly high.

    The big down side that I saw was that it obligates me to work for our good uncle until paid off. Else Bad Things Happen. It is on schedule to be paid off in 5 years, so hopefully that risk will be minimal.

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