TSP Loan and repayment with taxed income

[Rustynutt]

Been having trouble seeing the noise on my face lately, thought I'd check here.

I've had a couple of TSP loans the past 26 years. I understand my contributions are tax deferred and subject to income tax as an annuity or planned withdraw after retirement.

Repayment of those loans is from income that is taxed, essentially I'm returning tax deferred money loaned from the account with taxable income.

1. Is the taxable income used to repay the TSP loan of tax deferred contributions taxable as income when withdrawn after retirement?

2. And the portion that is considered "interest" that is repaid with taxable income, is it also tax free when withdrawn, or am I missing the whole picture?

3. Do I make any since what so ever? :D

[Show-me]

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.

[KevinD]

Another reason not to take out a TSP loan.

[ChemEng]

Another reason not to take out a TSP loan.
Wouldn't any loan you take out be repaid with after tax money?

[Show-me]

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.

[KevinD]

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?

[Show-me]

yes

[ChemEng]

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.)

[KevinD]

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?

[ChemEng]

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.)


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.

[budnipper1]

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.)

http://www.tsptalk.com/mb/images/buttons/viewpost.gif (http://www.tsptalk.com/mb/showthread.php?p=204528#post204528) ] 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.:)

[Rustynutt]

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 :suspicious:

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. :D

[ChemEng]

It's not a hard concept once you think about it. The problem is that most people never make that leap and only accept what they have heard as truth. It should go without saying that accepting what a person hears as truth without first applying a thought filter can put a person in a very precarious position.

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. :D

[KevinD]

How does not taking the loan save you any tax money at all?

1) $100K pre-tax in TSP. You make a $25K loan at a bank and pay it back with after tax money. In retirement your $100K in TSP is taxed.

2) $100K pre-tax in TSP. You make a $25K loan from TSP and pay it back with after tax money so now your TSP has $75K of pre-tax money and $25K of after tax money. In retirement you are taxed on the $75K. Thats the first time the $75K has ever been taxed. The $25K that you paid the loan with has already been taxed once and now it will be taxed again in retirement.

I'm just a simple man who sticks mail in mail boxes for a living. If you can show me where I'm wrong in my reasoning I would really appreciate it.

[ChemEng]

1) $100K pre-tax in TSP. You make a $25K loan at a bank and pay it back with after tax money.
2) $100K pre-tax in TSP. You make a $25K loan from TSP and pay it back with after tax money
3) Loan is paid off. So at this point in the analysis, both loans are paid off using the same amount of pool of money taxed at exactly the same amount. Notice the situations are exactly the same here for both TSP and any bank loan.
4) Draw down during retirement. You now have 2 different situations
a. No TSP loans. Draw downs taxed at regular income levels.
b. With TSP loans. Draw downs taxed at regular income levels.

Both situations are again exactly equal regardless of if you take a TSP loan or if you take a bank loan.


I'm just a simple man who sticks mail in mail boxes for a living.
I'm a simple missile engineer. We all got things to learn from each other on here. That's the beauty of this forum.

[KevinD]

You didn't address the difference between the $100K pre-tax distributions in retirement and the $75K pre-tax and $25K after tax distributions in retirement.

In scenario #2, if you had not made the TSP loan you wouldn't be taxed twice on that $25K.

Seems to me it would be similar to the basis of a deductible vs a non-deductible traditional IRA.

Sorry to be such a PITA but I'm trying to comprehend how I'm not being taxed twice on that $25K. That was the question in post #1 of this thread...

[ChemEng]

You didn't address the difference between the $100K pre-tax distributions in retirement and the $75K pre-tax and $25K after tax distributions in retirement.

In scenario #2, if you had not made the TSP loan you wouldn't be taxed twice on that $25K.

Seems to me it would be similar to the basis of a deductible vs a non-deductible traditional IRA.

Sorry to be such a PITA but I'm trying to comprehend how I'm not being taxed twice on that $25K. That was the question in post #1 of this thread...
Not a problem. Just to be clear--you agree with the analysis. You just want to specifically talk about the $25k, right? (I'm bouncing between airports today so it may not be until this evening that I get back to you.)

[KevinD]

Yep. The taxes on the $25K.

IMO - No loan would be best but if you have to borrow money it would depend on the math comparing the difference in the rates on the 2 loans and the double taxation on the TSP loan. After all thats what this thread was about to begin with.

[KevinD]

I got my answer and it only cost me $13.95. :embarrest:

http://www.fedtools.com/cgi-local/SoftCart.exe/online-store/scstore/products/p-TSP2008.html?L+scstore+bcwc8856ff47b047+1221955341

Granted the following example is on a loan that has a 6% rate...


There are two negative aspects concerning TSP loans that should be addressed. When the TSP loan
proceeds are disbursed from a TSP account, the borrower loses the earnings—interest, dividends or capital
gains—that the withdrawn monies would have accrued during the time they are not in the account. The
money used to back the TSP loan is done with post-tax dollars and taxed again when withdrawn. TSP
participants contribute to their TSP accounts on a pre-tax basis; TSP borrowers use post-tax dollars to pay
back their accounts and pay tax again when the borrowed and paid-back amounts are withdrawn. This is
double taxation; however, most 401(k) plans in private companies use this procedure for participants who
take on 401(k) loans.

In terms of dollars and cents, consider the following example for the cost of a TSP loan. Biweekly payroll
allotments are $140.50, consisting of principal and 6 percent interest. The following amortization table
illustrates the breakdown of principal and interest of a TSP loan.

Therefore, in paying back the $10,000, an individual also would have paid a total of $938.51 in interest
which is not deductible for tax purposes and $10,000 of principal, for a total of $10,938.51.
Assuming the individual is in a 28 percent federal and a 7 percent state income tax bracket—for a
combined federal-state tax bracket of 35 percent—the individual must earn $10,938.51/0.65, or $16,828
in pre-tax dollars in order to end up with $10,938.51 in post-tax dollars. Once the individual withdraws
the $10,938.51 from his or her TSP account, it will be taxed again, perhaps at a higher tax rate.

[budnipper1]

I got my answer and it only cost me $13.95. :embarrest:

http://www.fedtools.com/cgi-local/SoftCart.exe/online-store/scstore/products/p-TSP2008.html?L+scstore+bcwc8856ff47b047+1221955341

Granted the following example is on a loan that has a 6% rate...
Quote:
There are two negative aspects concerning TSP loans that should be addressed. When the TSP loan
proceeds are disbursed from a TSP account, the borrower loses the earnings—interest, dividends or capital
gains—that the withdrawn monies would have accrued during the time they are not in the account. The
money used to back the TSP loan is done with post-tax dollars and taxed again when withdrawn. TSP
participants contribute to their TSP accounts on a pre-tax basis; TSP borrowers use post-tax dollars to pay
back their accounts and pay tax again when the borrowed and paid-back amounts are withdrawn. This is
double taxation; however, most 401(k) plans in private companies use this procedure for participants who
take on 401(k) loans.

In terms of dollars and cents, consider the following example for the cost of a TSP loan. Biweekly payroll
allotments are $140.50, consisting of principal and 6 percent interest. The following amortization table
illustrates the breakdown of principal and interest of a TSP loan.

Therefore, in paying back the $10,000, an individual also would have paid a total of $938.51 in interest
which is not deductible for tax purposes and $10,000 of principal, for a total of $10,938.51.
Assuming the individual is in a 28 percent federal and a 7 percent state income tax bracket—for a
combined federal-state tax bracket of 35 percent—the individual must earn $10,938.51/0.65, or $16,828
in pre-tax dollars in order to end up with $10,938.51 in post-tax dollars. Once the individual withdraws
the $10,938.51 from his or her TSP account, it will be taxed again, perhaps at a higher tax rate.

Thank you for doing the research. The fruits of your efforts are crystal clear to me.

Here's another resource that covers part of this issure.
3 Considerations Before You Borrow From Your Thrift Savings Plan Account
http://www.myfederalretirement.com/public/130.cfm (http://www.myfederalretirement.com/public/130.cfm)

http://www.myfederalretirement.com/public/department46.cfm

[ripper]

I'm having trouble completely understanding the example regarding the $10k loan. Hopefully someone can show me the error in my thought process.
I understand the "double-tax" on the interest paid on a TSP loan. But I don't get how the principal repayment is "double-taxed".
For instance, in regards to the example:
What if the $10k that was borrowed was simply put aside and used to repay the loan? How is that amount being taxed twice, since you are not using taxed income to repay it?

Can someone explain what I'm missing here?

[ChemEng]

Ok from a different angle.

When you borrow $25k from a pretax account, you are increasing your relative purchase power for any posttax product. Think about that for a minute. So, assuming you are in a 25% tax bracket, that equals ~30% more buying power over using posttax dollars. When you repay that loan, you have to payback equal to that increased purchasing power plus interest. Repaying with posttax dollars is exactly equal to the amount of your increased purchasing power.


Yep. The taxes on the $25K.

IMO - No loan would be best but if you have to borrow money it would depend on the math comparing the difference in the rates on the 2 loans and the double taxation on the TSP loan. After all thats what this thread was about to begin with.

[KevinD]

Ok from a different angle.

When you borrow $25k from a pretax account, you are increasing your relative purchase power for any posttax product. Think about that for a minute. So, assuming you are in a 25% tax bracket, that equals ~30% more buying power over using posttax dollars. When you repay that loan, you have to payback equal to that increased purchasing power plus interest. Repaying with posttax dollars is exactly equal to the amount of your increased purchasing power.

But most people have no idea where the money went...especially when they are borrowing to pay off other debt. All they have to show for it is a hole in their wallet/account.

I agree with your premise but I'm afraid that reality is that most people just aren't that sophisticated. Many people have negative savings, negative equity in their car, negative equity in their home and balances on their credit cards. These people are Dave Ramsey and Clark Howard's audience. They're addicts. They have to go cold turkey or live chained to their debt and have to keep working till way onto their 70's. I'm not going to be one of those people.

Thanks for playing but I think this horse has had enough... :)

[KevinD]

I'm having trouble completely understanding the example regarding the $10k loan. Hopefully someone can show me the error in my thought process.
I understand the "double-tax" on the interest paid on a TSP loan. But I don't get how the principal repayment is "double-taxed".
For instance, in regards to the example:
What if the $10k that was borrowed was simply put aside and used to repay the loan? How is that amount being taxed twice, since you are not using taxed income to repay it?

Can someone explain what I'm missing here?

Then why make the loan in the first place?

[Show-me]

I'm having trouble completely understanding the example regarding the $10k loan. Hopefully someone can show me the error in my thought process.
I understand the "double-tax" on the interest paid on a TSP loan. But I don't get how the principal repayment is "double-taxed".
For instance, in regards to the example:
What if the $10k that was borrowed was simply put aside and used to repay the loan? How is that amount being taxed twice, since you are not using taxed income to repay it?

Can someone explain what I'm missing here?

I like this one. You use the money to trade with in a Roth and then use the principle to supplement income for the amount with held from TSP loan repayment.

No double tax there and you get the interest instead of the bank.

Or you repay the loan with a tax return.

No double tax there and you get the interest instead of the bank.

The main point is that you WILL pay take on any loan from any lender, so who cares if you pay tax on money you borrow from yourself. The upside is the bank don't get the interest, you do. The instrest will get paid no matter who you get the loan from.

Zero interest credit card are evil and if you make one payment error or it gets lost, you will pay all the back interest and have a new rate of 30% APR.

[ChemEng]

I agree with your premise
Then we are done.

Debt is simply a tool. You can choose to apply it to maximal effect like a hammer striking down a nail. Or you can choose to use it wrongly like trying to use a hammer to screw down a bolt. The bottom line is even if most people try to use the hammer to do the latter, it doesn't make the hammer any worse a tool. And to advocate not using hammers because people aren't smart enough to not use them to screw down bolts is crazy talk.

At some point we have got to get away from this lowest common denominator mentality in our culture. Mediocrity is very un-American.

[ripper]

Then why make the loan in the first place?

Obviously, no one would do this. I was merely trying to present an example of my thought in a simple form.
I just couldn't understand the example that stated that it would cost over $16k of earned income to repay a $10k TSP loan, especially when used for investing.
A couple of years ago I took out a loan for $20k for what I thought was a good investment opportunity that I couldn't pass up. I nearly doubled my investment in one year and paid off my loan.
According to the example, that loan cost me over $10k in earned income above what I borrowed. I still fail to see where that was the case.
I'm planning on taking out another loan for investment purposes. With its restrictions, the TSP is about the worst investment opportunity available. I think that the majority of the folks on this board could do much better with unlimited trading opportunities in all aspects of the market.
I only contribute to my TSP account for the matching funds. The tax deferment means little to me, as I estimate that I will be in the same tax bracket when I retire in five years.
If taking out a loan for investing is a bad idea, I wish someone would explain why.

[Prozium]

On further research, I agree with you.

Employees can also borrow money from their own TSP accounts at market-based interest rates through the TSP's loan program — loan amounts are not taxable if they are repaid to the TSP account on time.
http://www.fbijobs.gov/333.asp

[Prozium]

Loan interest rate: 2.125%
Sure thing G fund: 3.75%

To break even 5.875%. That is sure hard to do lately.

[ripper]

Loan interest rate: 2.125%
Sure thing G fund: 3.75%

To break even 5.875%. That is sure hard to do lately.

I believe the G fund return is equal to the loan interest rate....

[Show-me]

Isn't the G fund return equal to the loan interest rate?

Yes.

[KevinD]

If taking out a loan for investing is a bad idea, I wish someone would explain why.

I think we have determined that...


Debt is simply a tool.

I want to hear about...


A couple of years ago I took out a loan for $20k for what I thought was a good investment opportunity that I couldn't pass up. I nearly doubled my investment in one year and paid off my loan.

Care to share? :)

[ChemEng]

I want to hear about...
What exactly?

[Prozium]

Yes.

G fund - 12 month - 3.75%
http://www.tsp.gov/rates/monthly-current.html

Current loan interest rate - 2.125%
http://www.tsp.gov/calc/loan/calculate.html

Which means if you take a loan you need to get a return of at least 5.875% to break even.

[Show-me]

G fund - 12 month - 3.75%
http://www.tsp.gov/rates/monthly-current.html

Current loan interest rate - 2.125%
http://www.tsp.gov/calc/loan/calculate.html

Which means if you take a loan you need to get a return of at least 5.875% to break even.

The 12 month rate and the G fund current rate are two different dogs.



What will the interest rate be? http://www.tsp.gov/resources/top.gif (http://www.tsp.gov/features/chapter11.html#top)
The interest rate you pay for the life of the loan is the latest available interest rate for the G Fund at the time your application is processed. The interest you pay (http://www.tsp.gov/features/def_ch11doubletax.html) on the loan will go into your TSP account, along with repayments of the loan principal. Visit Current Information (http://www.tsp.gov/curinfo/index.html) on this Web site or call the ThriftLine (http://www.tsp.gov/features/def_ch1-TSP-service-office.html) to find out the current interest rate for TSP loans. Also, if you use the Loan Calculator (http://www.tsp.gov/calc/index.html) on this Web site, the calculator will use the current rate automatically.

[KevinD]

What exactly?

rippers deal where he doubled his money.

I'm here to learn and boy am I getting schooled. :D

[ChemEng]

That the right attitude to have.

We all start at the beginning Kevin. Just keep trying to make sense of things for yourself. Keep asking why until either it makes sense to you or they change their stance (or stop answering :)).

rippers deal where he doubled his money.

I'm here to learn and boy am I getting schooled. :D

[KevinD]

I may need some stinkier bait... :D

[roskopfm]

Another item you need to take into considering is the double taxation on the interest expense. Say you borrow 10,000 and pay it back plus 500 in interest. The 500 was already taxed out of your pay check. When you deposit it in the TSP you dont get a deduction. Then down the road if you withdraw that 500 it will get taxed again. Doesnt seem fair.

[ChemEng]

Here we go again. Please read back through the thread one more time. The amount of interest you pay back is exactly equal to the increased purchasing power you obtained from taking out the loan from the TSP. That sounds very fair.


Another item you need to take into considering is the double taxation on the interest expense. Say you borrow 10,000 and pay it back plus 500 in interest. The 500 was already taxed out of your pay check. When you deposit it in the TSP you dont get a deduction. Then down the road if you withdraw that 500 it will get taxed again. Doesnt seem fair.

[Boghie]

Let’s fire this up again

First, a loan is a loan is a loan. You will pay it back with money AFTER the Grasping Hand takes its chunk. In the example provided, a very pleasing and normal 35% combined Federal and State income tax rate. Conversely, you deposited the assets into your TSP account with money which never felt the mordida of the Grasping Hand. You are 35% ahead right there. And, if you are reviewing this board and poaching ideas you are probably making a 9% annualized return rather than the paltry ‘G Fund’ 2.5%.

The below uses the previous examples assumptions: 28% Fed tax, 7% State tax, 3.125% loan payback.

So, to initially put the $10,000 in your TSP account you had to put $10,000 into your TSP account. The math is very simple on this one, eh. Not so simple actually. Up to half of it is ‘free’ – that is, matching funds. Yippee….

Now you borrow that $10,000 from your TSP account and you get a payment plan. You get the honor of paying yourself 3.125% compounded interest for the benefit of using your own assets – actually, not a bad deal. We will assume a five year payback. It will cost you 180.24 per month to payback the hole in your TSP retirement account.

To be able to pay that $180.24 with after-tax money you will need $277.29 in gross (pre-tax) money. So, over five years, borrowing $10,000 in pre-tax contributed assets costs you $16,374 to replace in a post-tax world. This is just a slightly different angle on the previous discussion – taking it to a monthly payment.

Now, let us look at the earnings loss that the hole made. I will assume that you can earn 6% on average in a balanced TSP allocation. That $10,000 would have become $13,382.26. That $3,382.26 is the return you will not make once you take the loan. (The deal doesn’t look so bad if we have negative growth though – yuk, yuk).

Lastly, you get the honor of paying that 35% income tax (hopefully) again when the money is pulled out during retirement. So that $10,000 (inflation adjusted) provides $6,500 in after-tax cash.

Let us add it up:

It cost you $10,000 to put it into TSP
It cost you $16,374 to replace the $10,000
It cost you $3,382 in earnings to use your $10,000
You get to roll around in $6,500 (after tax) in gold coins at the Golden Pond retirement house

Conversely, if you didn’t take the loan:

It cost you $10,000 to put it into TSP
You earn $3,382 over the 5 years (giving you $13,382)
You get to roll around in $8,698 (after tax) in gold coins at the Golden Pond retirement house

However, ChemEng is correct - any loan for $10,000 will cost you $16,374 in post-tax income to pay back. But, he is not factoring the lost earnings. Nor the time it takes to refill the hole. But, if your account is large enough and you absolutely need the assets (maybe to pay off credit cards) and you don’t get into a habit of treating your retirement account as an ATM I can see the value. Also, where else can you borrow $10,000 at an interest rate of 3.125%. There are positives.

But those thinking they should use a loan to invest outside of TSP must factor in the cost of paying it back after you spent a couple of years putting it in. You have to factor in the cash flow. Are you going to reduce your pre-tax TSP contributions to pay your post-tax loan back? You have to factor in the loss of compounding investment income. Thus, if you don’t make at least $9,756 in net gains in your post-tax investment over the five years you haven’t broken even. That’s a little more than an average annualized return of 14% - rather tough, and this example doesn’t include brokerage fees (poor gold bugs!!!) nor the fact that the additional $3,382 would accumulate earning for years.

To me, the opportunity to take a necessary loan at very low interest rates is an amazing benefit if I absolutely need the cash. But the secondary costs are huge and not the same as those in a conventional loan.

[rtpjr]

Hello, I'm brand new here, but it looks like you'all may be able to assist.

My idea is to
1) take out a general purpose loan from the TSP for say 5 yrs.

2) Then also continue to contribute the maximum amount from my pay, assuming I can still afford to live, and use the 5yr loan money to live on??

Can I:
1) continue to contribute 5% to take advantage of the match? while I pay back the loan?

2) simultaneously pay back the low-interest tsp loan?

3) take advantage of contributions to TSP made in 2010, such as the 5% and whatever salary monies I have that I can afford, in order to reduce my 2010 taxes?

Or am I not permitted to put extra salary money into the tsp while paying back a loan?

Comments appreciated , thank mucho:)

[Callme_CO]

Can I:
1) continue to contribute 5% to take advantage of the match? while I pay back the loan?

Yes this does not affect your future contributions or the 5% match. Only an early withdrawl will affect future contributions for 6 months.



2) simultaneously pay back the low-interest tsp loan?

The money you pay back towards the loan will be seperate from the money that you would normally contribute. You will/should see this different on your pay stub. One will/should be listed as TSP Contributions and one as TSP Loan repayment

[rtpjr]

Thanks much Call Me Co;)

To me this is a great strategy to avoid additional taxes next yr....take out a loan to live off (at 3%) and push and equivalent $$ into tsp to save 20% on taxes.....:D

[Scout333]

Welcome aboard! Glad to see you're exploring your options. This topic has been gone over in great detail on this site. Suggest doing a little reading here and on the TSP.GOV site. Don't forget that when you take out money re a loan it is no longer invested. The 3 % interest is no big deal since you are paying yourself back if that makes sense. You would "lose" any potential profits on the money which is taken out as loan proceeds however or could avoid losses on these funds if you are invested and the markets go down. Lots to consider. If you really want to get confused throw in the tax considerations!:D Good luck! Feel free to ask your questions as we have some really smart folks here.

[ChemEng]

Somehow I missed this post earlier. So, I'm responding to it now.


he is not factoring the lost earnings.
These "lost earnings" are equate to the minimum monthly amount you would have to pay if you took out the loan outside of TSP. Calling them lost isn't exactly accurate.


Nor the time it takes to refill the hole.
Given same loan type, interest rate, and period of repayment, the time to refill the hole is the same regardless if you took the note from TSP or from a bank.

[Callme_CO]

I still hate the idea of having a loan out there even if i'm paying back myself.

[SkyPilot]

I have had to max out the TSP loan limit for kid's school bills. As I needed to diversify anyway, this did not turn out so bad. True, if I had been able to pick the right place to put that money for the next five years, I could likely earn much more than I will per the G fund rate. But, the extra that I didn't need to pay off the loans, I put against my HELOC, so I am gaining some there as well.

It's best not to have to touch your TSP account, but at least you don't have the loan fees that you would acrue with other banks. So, in some ways, if you manage it well, you are the Bank of You :)

This would have been a great move if I had moved the money three years ago instead of this summer !

Who knows, maybe the kids will pay it back :nuts:. Then I have my own annuity as well :blink:

[rtpjr]

Scout: thanks for the welcome, and hello ChemEng. I have been trolling thru reading some stuff here...I have quite a bit in the tsp and I subscribe to the ******** to help me out. I admit I did not follow the strict advice of ******** this past year, but i did avoid much of the downdraft. Anyway, ******** called the bottom and told investors to get back-in before the market bounced back so I have some confidence in their recommendations.

As for ..."when you take out money re a loan it is no longer invested"... I understand that, but in this market, I feel I can earn more money saving taxes than market return in 2010....

[Boghie]

Scout: thanks for the welcome, and hello ChemEng. I have been trolling thru reading some stuff here...I have quite a bit in the tsp and I subscribe to the ******** to help me out. I admit I did not follow the strict advice of ******** this past year, but i did avoid much of the downdraft. Anyway, ******** called the bottom and told investors to get back-in before the market bounced back so I have some confidence in their recommendations.

As for ..."when you take out money re a loan it is no longer invested"... I understand that, but in this market, I feel I can earn more money saving taxes than market return in 2010....

RTPJR,

A TSP loan will be paid back via a billing or an allotment - separate from your TSP contributions and via taxed income. It must be paid in full prior to leaving government service for any reason.

Thus, you will be taking pre-tax money as a loan and paying the principal plus interest back with after tax money. At that point it is identical to a bank loan.

It is NOT a tax management strategy.

In fact (I think:confused:), you will be stuck paying income tax on that money twice. The first time when you pay back the principal and interest on the loan, the second time when you pay income tax on the distributions you receive during retirement.

Thus, do not do this as a tax planning strategy.

But, as Chemical Engineer has stated, there ain't no better loan out there.

[Scout333]

Bump

[watchdog311]

I thought the rules (TSP-536) said...

If you separate from Federal service with an outstanding TSP loan and you do not repay the entire loan by the established deadline, we must declare a taxable distribution of your outstanding loan balance before we can process your withdrawal request.

Isn't the deadline the agreed length of term or am I wrong?