Borrowing from TSP for Mortgage

What was your experience?

Can you still take the interest off at tax-time?

What are advantages verses conventional mortgage?

Is closing easier/less expensive?

[Dogdaddy]

greg wrote:
What was your experience?

Can you still take the interest off at tax-time?

What are advantages verses conventional mortgage?

Is closing easier/less expensive?



Haven't done one, but investigated it thoroughly (You can print the documentation on TSP website).

Advantages: none

Disadvantages: (1)TSP Real Estate Loan is NOT A MORTGAGE and the interest is therefore not deductible, (2)IRS limit of $50,000 for 15 years, and (3) If you leave Federal Service (retirement or otherwise), you must repay the entireloan amount when you leave or it will betreated as a taxable distribution from your TSP. etc, etc, etc

In my opinion, there are just too many other sources forReal Estate money to consider such a loan, and where can you buy a primary residence (a requirement) for $50,000, anyway ?

Print the booklet and readit...it contains all the info you need to decide if ANY TSP loan makes sense........Certainly doesn't make sense to me.

:i

[Dave M]

In 1996 I took out a loan from my TSP, in order to clear up some consumer debt I was forced to take on due to personal circumstances. I paid it back over four years.

Since the interest is credited right back to the account, I figured it would cost me only the very small administrative fees. Over time the true costs became clear to me.

1. Interest is calculated according the G-fund return rate. So that is what the money you borrowed "earns." Had that money remained in the account, and been invested in a stock fund, odds are the return would've been greater. This is a relatively small penalty.

2. The loan is repaid using after-tax dollars. This is a big hit. Say you are in the 25% marginal tax bracket, you must earn 4 dollars to pay back 3. Then in the future when you make a withdrawl, the money is taxed once again, at the 25% rate let's say. For every 4 dollars you withdraw, you get to keep 3. You just lost 50% of your loan amount to the IRS.

Borrowing and repaying, borrowing and repaying, turns your TSP into something like a passbook savings account, sacrificing all the tax advantages.So you should reserve this for a true emergency, like medical necessity or to bail you out of jail. Under no circumstances should you use the money to buy something that is going to decrease in value, or for simple consumer needs. Using TSP money to buy a home does not qualify. If you need more money, reduce your contribution; you will save in the long run.

Dave