Thread: TSP Loan Rate

I have a question about the tsp loans and I'm sorry if it is not suppose to be posted here I could not find the answer anywhere. I am in my tsp loan at a rate of 3.5% and the current rate is 2.5%. Is their a way for me to take advantage of this current rate with my past loan? If I Reamortize my current loan will it change my rate to the current rate?

Originally Posted by 87LiftedHigh

I have a question about the tsp loans and I'm sorry if it is not suppose to be posted here I could not find the answer anywhere. I am in my tsp loan at a rate of 3.5% and the current rate is 2.5%. Is their a way for me to take advantage of this current rate with my past loan? If I Reamortize my current loan will it change my rate to the current rate?

reamortizing will only change your payment amount and duration of the loan, not the interest rate.

is it a general or home loan?

with a general loan you have the option of arranging temporary financing from another source, pay off the loan, then wait 60 days and take out a new general loan at the lower rate. borrowing from peter to pay paul so to speak, about a 90 day juggling act to pull it off by the time it is all settled. if the amount under loan is significant maybe the interest savings would be worth it.

if it is a home loan, i don't think you can take out another without re-purchashing a home, so you would have to retire the home loan, then take out a general loan on the second move, limits your options to tap the general loan feature if needed because you can only have one of each type open at any time.

i have used the general loan as a sort of 'forced' savings plan. take out the loan and deposit the cash, makes my balances bigger in private accounts, emergency money is always there immediately if needed, then pay yourself back every pay period to rebuild retirement savings. makes me feel like i'm making progress toward building sufficient balances and emergency fund without having to save a bit each time and wait for it to accrue.

downside is you miss upside gains because balance is not there in tsp to catch the wave. on the other hand, i've been getting pounded by the waves so a gauranteed 3.5% return on my own repayments might not be a bad thing.

I have been re reading all this and I haven't been to the TSP.gov site to check any of it out but I have some questions and a scenario.

Question: some of you appear to be saying the loan is variable based on the G fund rate? Others allude it is fixed at the time you make the loan. You are always a confusing group.

Scenario: someone who owes 37k on a home scheduled to be paid off in 2.7 years is paying 5.25% interest. Still required to have an escrow account. If that person borrowed 37K from his/her TSP account to pay off said mortgage and paid the TSP loan off in 3 years, what would be the advantage or disadvantage?

There is no longer a tax advantage for mortgage interest.

Can you still contribute the max amount plus over 50 amount in addition to the loan repayment?

Which funds does the loan get taken from?

Does the loan repayment go to the same funds as your allocation?

Does the repayment allocation change as you change your allocation?

For example, if you change your allocation to 100% C and get a loan, does it all come from C? That would be good today as funds in C today are losers.

If you change your allocation to say 100% F, does the repayment all go in to F fund?

What if you do an IFT to 100% C and get the loan? Then do an IFT to wherever. All money is borrowed from C? Where does the payback go?

Random questions.

Originally Posted by PessOptimist

Scenario: someone who owes 37k on a home scheduled to be paid off in 2.7 years is paying 5.25% interest. Still required to have an escrow account. If that person borrowed 37K from his/her TSP account to pay off said mortgage and paid the TSP loan off in 3 years, what would be the advantage or disadvantage?

tsp residential loan at 2.5% is a significant interest savings. bonus is you are paying yourself not the bank.

There is no longer a tax advantage for mortgage interest.

i don't know, maybe the tsp residential loan does allow mortgage interest tax advantage.

Can you still contribute the max amount plus over 50 amount in addition to the loan repayment?

yes. loan repayments are not counted as new contributions, you are replacing prior contributions, they do not affect current year contribution amount.

Which funds does the loan get taken from?

yours.

Does the loan repayment go to the same funds as your allocation?

yes, same as your contribution allocation.

Does the repayment allocation change as you change your allocation?

yes, same as your contribution allocation

For example, if you change your allocation to 100% C and get a loan, does it all come from C? That would be good today as funds in C today are losers.

If you change your allocation to say 100% F, does the repayment all go in to F fund?

What if you do an IFT to 100% C and get the loan? Then do an IFT to wherever. All money is borrowed from C? Where does the payback go?

yes, same as your contribution allocation


by taking a tsp loan at 2.5% now you are locking in that rate of return on that money for the term of the loan. depending on your investment style, you may have intended to keep that amount in a vehicle that returns a similar safe amount anyway, like the 'G' fund.

if you are the type that likes to push all your tsp funds in the 'S' or 'I' when you devine that the market is about to go on a +10% roll, then you would have less funds (the amount locked in under loan) to take advantage of your hunch. otherwise, no loss of investment opportunity there.

someone else can do a better job of explaining the pre-tax/after-tax repayment thing, i'm not good at math. i try to boil things down to a simple yes or no answer.

if you had a choice to pay yourself 2.5% or the bank 5.25%, which would you rather do?

tsp balance is just funny money anyway. does you no good until you actually retire. many a slip twixt the cup and the lip, might not ever get there. i live for the moment, you only have so many of them. besides you can't eat your tsp balance. well, you can eat the statements it's written on, but not very satisfying. and if you opt for electronic delivery only to save paper and the planet, then all you get is to lick the monitor. no soup for you.

Thanks for the reply, burrocrat. I still have not gone to the TSP site to look in to this since it was a thing that came up last night on a multiperson chat with friends/realtives. Definitely worth looking in to.

The pre-tax/after tax thing brings up another question. If I take this money out as a loan, do I have to pay tax on it like it's income?

One of the plus sides to this is that it becomes my obligation and the joint ownership house is "lein free" which could simplify future life situation changes. Hell, I am going to be the one paying it off anyway.

What I meant by there no longer being a tax advantage for interest paid is just that-last tax year the interest was not enough to use itimezed deductions based on other expenses. So that is not a player.

What I meant by "what funds does it get taken from". Obviously mine. I meant if I am say 20% in five funds, does the loan get sucked out of all five funds equally?

Any one else who has something to say, please do. I will go to TSP.gov and check this out further.

PO

I have experience and will comment or pm you later...

QUOTE=PessOptimist;281611]Thanks for the reply, burrocrat. I still have not gone to the TSP site to look in to this since it was a thing that came up last night on a multiperson chat with friends/realtives. Definitely worth looking in to.

The pre-tax/after tax thing brings up another question. If I take this money out as a loan, do I have to pay tax on it like it's income?

One of the plus sides to this is that it becomes my obligation and the joint ownership house is "lein free" which could simplify future life situation changes. Hell, I am going to be the one paying it off anyway.

What I meant by there no longer being a tax advantage for interest paid is just that-last tax year the interest was not enough to use itimezed deductions based on other expenses. So that is not a player.

What I meant by "what funds does it get taken from". Obviously mine. I meant if I am say 20% in five funds, does the loan get sucked out of all five funds equally?

Any one else who has something to say, please do. I will go to TSP.gov and check this out further.

PO[/QUOTE]

Looking on the TSP.gov site answered most of my questions. Amazing what you can find out by actually looking for yourself!

The only thing not perfectly clear is if the payroll deduction for payoff is before or after tax money. I am assumng after tax, but if so then does that portion of my TSP account still get taxed when I take distributions when I get old(er)? Or, is that one of the prices I pay for this loan?

This would have to be a general purpose loan, as residential loans to pay off existing mortgages are not allowed. That was always my intention anyway, get away from the mortgage company and the escrow account.

Yeah, I think I'm smart enough to remember to pay my taxes and insurance all by my self.

Some may say that it isn't legal to do this but as far as I can see I could take a general purpose loan for 50k and put it all on red down at Lone Butt casino. Course, Lone Butt was moved away from the Butte so Vee Quiva is closer. Course if I won I'd have to make it through Laveen and South Phoenix alive.

Since I'm doing so well this year with my TSP account (yeah the tracker reflects the real account) I can't see how I would lose more money.

This sounds like a good idea the more I look at it. Which is why all my alarms are going off. Danger, danger pessoptimist.

PO

Originally Posted by PessOptimist

Looking on the TSP.gov site answered most of my questions. Amazing what you can find out by actually looking for yourself!

The only thing not perfectly clear is if the payroll deduction for payoff is before or after tax money. I am assumng after tax, but if so then does that portion of my TSP account still get taxed when I take distributions when I get old(er)? Or, is that one of the prices I pay for this loan?

This would have to be a general purpose loan, as residential loans to pay off existing mortgages are not allowed. That was always my intention anyway, get away from the mortgage company and the escrow account.

Yeah, I think I'm smart enough to remember to pay my taxes and insurance all by my self.

Some may say that it isn't legal to do this but as far as I can see I could take a general purpose loan for 50k and put it all on red down at Lone Butt casino. Course, Lone Butt was moved away from the Butte so Vee Quiva is closer. Course if I won I'd have to make it through Laveen and South Phoenix alive.

Since I'm doing so well this year with my TSP account (yeah the tracker reflects the real account) I can't see how I would lose more money.

This sounds like a good idea the more I look at it. Which is why all my alarms are going off. Danger, danger pessoptimist.

PO

Ok, here's my 2 cents, FWIW
When we took out our loan, the interest rate was 3.5%.
As far as I am able to tell by my pay stubs, all this is before tax deductions.
Correct me if I'm wrong, but a TSP loan is not considered a distribution so no tax is due.
I think that is the general idea behind the loan program, as it is your money that you already contributed before taxes,
so it remains that way unless you default on your loan, at which point you will get nailed for about 50%
of the original amount in early withdrawal penalties and tax.
The best thing for us was (wish I could say it was my astute planning, but ney) we borrowed just as the market started to peak and fumble in 2007.
So all the time the market was tanking hard, we were earning 3.5% and DCA'ing with every repayment. Not stellar, but a gain.
After refinancing last year, we restructured our contribution amount just above the level needed to get our match,
then added the 3 or 4% from that difference as an additional amount of repayment to our loan. Our total amount contributed to TSP remains the same,
but we lop about a year + off the term.
I regularly adjust my contribution allocation, as there are no limits to transactions, and only a day ahead of payroll is needed to process a change.
Using that and the <1% IFT's, I can shift enough back and forth to buffer the market if I have maxed my 2 IFT's for the month.
You can borrow about half of your TSP's worth.
There is no credit agency qualification or reporting, and as far as I know, it is not considered a debt, just a tax liability if not repaid as agreed.
Both you and your spouse will have to sign the agreement.
Before we applied, I IFT'd all our funds to G, then reallocated after the loan was disbursed.
At worst you would miss out on the compounding interest of 37k (decreasing as paid off) if the market went up more than (2.5% + 5.25%) during your loan,
at best, you would pay yourself the 7.75% and could DCA with your contribution allocation if the market tanked.
3 years is a fairly short timeframe to repay that chunk of change IMO, and I think you'd be hard pressed to find many economists
that would predict us rising to 2007 market levels in 3 years.
Given that, depending on your tolerance for risk, you might be able to squeeze 8% gains consistently,
however, turn on any investor news and the "experts" predict single digit returns well into 2012...
Do you need the credit history your house payments provide?
If not, and it were me, I think I could mentally justify that as "paying myself first" and do it.
GL

This topic has been explored in great detail previously in the thread below-

Re: TSP Loan and repayment with taxed income

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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! Good luck! Feel free to ask your questions as we have some really smart folks here.

Originally Posted by Scout333

This topic has been explored in great detail previously in the thread below-

Re: TSP Loan and repayment with taxed income

According to lite blue ePayroll the only pretax deductions noted for me are medical :

Thrift Savings Plan (TSP): 5% - (Regular) (figured as percentage of your base, no matter the actual amount of your pay.)

Health Plan Pre-tax: 105 BLUE CROSS AND BLUE SHIELD

FEDVIP Dental Pre Tax

TSP Loan: G

fyi