Originally Posted by
Scout333
I used a residential TSP loan as a bridge a couple of years ago while waiting on our first house to close. Seems that it took about three weeks to process. Was able to fax some of the paperwork and selected EFT deposit as the option for receiving the money. You can get more info re TSP Loan Booklet. I remember it being a fairly stress free process. Just a tip. Pay back as quickly as you can. There are pretty significant tax costs if you leave government service before it is repaid. So, not too good for a long term loan. JMHO
Good luck.
TIAA loan or TSP loan
--- calculation of interest rate and hidden charge
I. TIAA-CREF loan.
A TIAA-CREF loan looks very similar to most commercial loans from banks: there is no change in the total balance of the retirement account, only a collateral account is set up, the loan is funded by TIAA, and monthly payment pays back to TIAA. That is, TIAA is the lender, just like a bank who provides mortgage loan or auto loan. However, beyond the interest payment of the loan, there are some hidden costs.
1. Current interest rate of TIAA-CREF loan is 5.52%.
2. Hidden charge of collateral account.
Although the total balance of entire retirement account remains the same, 110% of loan amount is frozen as a collateral account. (See [1] for description of collateral account.) The collateral account (frozen account) is invested in a Supplemental TIAA Traditional Annuity which has a lower growth rate than the Retirement TIAA Traditional Annuity (a regular account). Current growth rates are:
Supplemental TIAA Traditional Annuity: 3.00%
Retirement TIAA Traditional Annuity: 3.35%
With difference in these two types of accounts, TIAA-CREF charges the difference 110%*(3.35%-3.00%)=0.385% as a hidden cost.
3. Missing gain of investment.
If a loan was not made, the frozen fund is available for investment as one’s choice. Assume that the same amount would be invested in a portfolio X with annual gain 6%. The missing gain (pre-tax) is 110% * (6% - 3.35%)=2.91%.
4. Total cost.
The total cost (after tax) of a loan is:
5.52% + 110% * (3.35% - 3.00%)*(1-15%-5.5%)
+ 110% * (6% - 3.35%)*(1-15%-5.5%) =8.144%
where 15% and 5.5% are margin rates for federal and state income tax at age of 59 ½ (since the hidden charge and investment loss are occurred in the pre-taxed account).
Please note that the missing gain of investment is an expected number: it could be positive, or negative. For a lower risk investment, it is more reasonable to consider Retirement TIAA Traditional Annuity as the Portfolio X. In this case, the total cost is
5.52% + 110% * (3.35% - 3.00%)*(1-15%-5.5%) =5.826%
II. TSP (Thrift Saving Plan) loans
The TSP loan looks rather complicated than TIAA loan. TIAA loans are funded by the lender (TIAA) instead of the retirement account of the borrower. Instead of a collateral account, TSP loans are funded by the retirement account of the borrower (the total balance of the retirement account is correspondingly reduced, and monthly payment will be returned to the account) [3, 4].
1. Interest rate. The interest is stated in the loan contract (current rate 2.00%).
2. Similar to a TIAA loan, the borrower is not able to invest the fund in his/her choices. Assume a low risk investment (it is reasonable for the account owner who is in an urgent of needs money). Say, G Fund (last 30 days performance is 2.35% annual). The difference 2.35%-2.00% is the equivalent of hidden charge as TIAA loans.
3. If Portfolio X (other than G Fund) was the intended investment of the account owner if no loan was made, then the missing part of investment gain is 6%-2.35% where 6% is assumed annual gain of Portfolio X.
4. Since the monthly payment directly returns back to borrower’s account, the total cost (after tax) is
2.00% + (2.35% - 2.00%) * (1-15%-5.5%) + (6% - 2.35%) * (1-15%-5.5%) = 5.18%
plus $50 one-time application/processing charge at the front, where 15% and 5.5% are margin rates for federal and state income tax at age of 59 ½.
5. Similar to the discussion for TIAA loan, the 6% gain of Portfolio X is an expected number. With a conservative investment in G fund (as Portfolio X), the total cost is
2.00% + (2.35% - 2.00%) * (1-15%-5.5%) = 2.278%
plus $50 one-time charge.
III. Other types of commercial loans.
Current mortgage rate is 4.15% for 15 years fixed. The actual cost (after tax) is
4.15% * (1 - 25%) = 3.113%
where 25% is the current margin rate for federal income tax (note that some states do not have the mortgage interest as a deduction in income tax). Home equity loans are almost similar as regular mortgages (with less closing cost in some cases).
Current auto loan is 4.5% in some credit unions. The actual cost is 4.5% since there is no hidden charge or tax benefit involved.
IV. Summary.
If a borrower has choices of TIAA loan or TSP loan (as one is a higher education employee, whose spouse is a government employee), it would be a better to choice a loan from TSP. However, a bank loan with house or vehicle as collateral could be an even better choice. Certainly, one should avoid any non- collateral loan, such as, credit card loan, student loan. Most of these have two digits interest rate.
Advantage of TIAA loan. Although the total cost for a TIAA loan seems higher than all others, TIAA does have some advantages that others may not have: An early payment to an existing TIAA loan will automatically reduce the monthly payment afterwards, and raise the limit of a new loan in near future with no additional cost (some home equity loan does have similar flexibility with zero cost, while most regular home mortgages do not: it does not reduce the monthly payment immediately and does have an additional closing cost for cash-out in the future).
References
1. http://en.wikipedia.org/wiki/Collateral_(finance)
2. I. S. Schloss, D. V. Abildsoe, Understanding TIAA-CREF: how to plan for a secure and comfortable retirement. ISBN-13: 9780195131970 - ISBN-10: 0195131975 (2001)
3. https://www.tsp.gov/planparticipation/loans/loanBasics.shtml
4. https://www.tsp.gov/PDF/formspubs/oc96-16.pdf
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