Thread: TSP Loan and repayment with taxed income

It is all taxed, TSP does not keep track of what money you pay back with taxed income.

It is like borrowing money from the bank, you will pay taxes on it.

Another reason not to take out a TSP loan.

Originally Posted by KevinD

Another reason not to take out a TSP loan.

Wouldn't any loan you take out be repaid with after tax money?

Originally Posted by ChemEng

Wouldn't any loan you take out be repaid with after tax money?

Thank you ChemEng, that has been my point for over a year. And the interest would go to yourself instead of a evil bank.

Plus, I am doing my taxes and my initial tax liability for 2008 is going to be less than $700 possibly a lot less depending on how things go. So I don't care if I pay a little income tax to repay my TSP loan, I would pay it anyways if it was a loan to a credit card company or any other lender.

Originally Posted by ChemEng

Wouldn't any loan you take out be repaid with after tax money?

But it will be taxed again when you take distributions in retirement. That was the OP's original question, right?

yes

Originally Posted by KevinD

But it will be taxed again when you take distributions in retirement. That was the OP's original question, right?

But its not a negative feature of the TSP loans like you were saying.

The tax features of the two loan options are:
1. Get a loan outside TSP. You repay it with after tax money. Your TSP still gets taxed.
2. Get a TSP loan. You repay it with after tax money. Your TSP still gets taxed.

The only major difference between the 2 options is that if you use your TSP account to take out a home loan, the interest you pay on that loan is not deductible like a regular mortgage would be. But that's only because you are paying yourself the interest.

Aside from that minor point, there is no differentiation between the two options in terms of taxing. (Although as ShowMe mentioned--TSP loans have an additional feature that allows your account be paid interest instead of paying the bank that money.)

The only way to save money on taxes in this deal is to not make the loan at all. Kinda makes the case for living debt free, don't it?

Originally Posted by KevinD

The only way to save money on taxes in this deal is to not make the loan at all.

How does not taking the loan save you any tax money at all? Your tax rate stays the same both with and without the loan. It's your effective cash flow that changes... (In fact saving the money can actually cost you *more* in taxes once you consider the capital gains that you incur.)

Originally Posted by KevinD

Kinda makes the case for living debt free, don't it?

Sadly, I'm sure there are many people that would find this argument convincing.

Originally Posted by ChemEng

How does not taking the loan save you any tax money at all? Your tax rate stays the same both with and without the loan. It's your effective cash flow that changes... (In fact saving the money can actually cost you *more* in taxes once you consider the capital gains that you incur.)

Originally Posted by Originally Posted by [KevinD

] Kinda makes the case for living debt free, don't it?

Sadly, I'm sure there are many people that would find this argument convincing.

Yep, I'm convinced.

Originally Posted by Show-me

yes

Well the difference between taking a bank loan, and one from the TSP is that your using taxable earned income to repay funds that were not yours in the first place.

Obviously, the funds taken from the portion of the TSP a member is vested in is their own. The fact that it was put there "tax deferred" doesn't offset the fact that the member is now paying income tax on the amount, if abit earlier than planned.

While the TSP may not keep track of it, I sure as heck have

I'm not arguing any of the points here, and am surely no TSP or tax expert, but have yet to see something put in my face where it says the Federal Government can double tax me on those funds.

I've noticed that some of the ones already retired here state that their pensions arrive without withholding, and would think that an opportune time to reduce income reporting via documentation that the tax has already been withheld. Since TSP accounts, aside from the loan programs are virtually frozen accounts until retirement, I would think that a creative accountant could realize benefit from those payouts already being taxed.

I'm guessing however, that buried deep within the anals of the IRS is some obscure rule allowing double taxation in this instance.

I'm sure the "living debt free advocates" have their point, and will readily admit that there have been times when the debt actually feels a burden, but the quality of life, IMHO, well out weights having to drive a pre WWII Volkswagen to work and on vacations during a period of life where one not only works towards a comfortable retirement, but is working because of what the world has to offer them at the time. I've enjoyed an over abundance of material things in my life, and it's what drives me to labor. I've spent my career working in a pay level nothing near to what some in the recent past have made just by pounding nails into wood. I've managed my debt, not always perfectly, but as income has allowed to enjoy the fruits of labor, and still posses those things. The fact I used debt to acquire them isn't of any matter. I consider them assets, much like some buy gold, but mine are tangable and have other use than just providing the (false?) feeling of security. Not that gold is a bad thing, one can spread it about the room and watch it glimmer, as long as the power is still on, but most people I know wouldn't have much use for it realistically. In the end it will just be dug up by some farmer 500 years in the future. My sons inheritance was the opportunity to obtain an education I provided him. My future wife's security will be that when I retire, it will be with survivor benefits and a home to live in free and clear, other than political and governmental greed in perusing the taxation of the fruits of my labor long after I'm gone. The best scenario would be to have just enough to pay for cremation so the government can't collect **** from an inheritance tax.

Anyway, the general consensus seems that the money is being double taxed, at least with what's been posted so far. I'd bet the average IRS auditor would be about as confused as well. One that's a lawyer or politican too, well, you know which way they would lean.