Thread: TSP Loan and repayment with taxed income

Originally Posted by 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....

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), 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.

Bump

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?