1. Currently our only debt is our home mortgage and one vehicle loan. The vehicle being replace is fully paid off.
2. We typically own our vehicles 10+ years before replacing them and repay the purchase loan within three years (often less).
3. Our retirement savings (and savings rates) are significantly above the nation's average.
4. For our investments, we have an established asset allocation and we rebalance on a regular basis to maintain that allocation across our entire portfolio (of which our TSP is only a portion).
5. The proposed amount of the TSP loan (i.e. car loan) is less than the current balance in our G Fund.
6. Current TSP loan rate: 2.25% APR for 60 months
7. Current Credit Union loan rates: 2.0% APR for 36 months, 2.4% for 60 months
8. I have 10+ years until my retirement window opens up.
According to the TSP website:
Based on the facts I presented, I believe it is possible to mitigate away the TSP loan indirect costs by effectively taking the loan only from the G Fund balance. I would do this by making an inter-fund transfer after the loan processes to reestablish the pre-loan balances in the F, C, S, and I funds. I would then be repaying the TSP loan at the G Fund interest rate and the interest payments get put back into my TSP account. The only performance hit I can see is if the G fund interest rates increase over the next three to five years. However, they would have to increase significantly to out weigh the completely lost interest payments to the credit union. And if we do experience significant increases in G Fund rates, I can always repay the loan early with money from my other fixed interest investments that may be earning lower interest rates.
Loan Fee. The TSP charges a loan fee of $50 for administrative expenses. The TSP deducts the fee from your loan proceeds. For example, if you request a loan for $1,000, the amount paid to you will be $950.
Interest. The interest rate on your TSP loan is the G Fund rate at the time your loan application is processed. This rate is fixed for the life of the loan. Although TSP loan interest is not tax-deductible, all of the interest goes back into your TSP account.
Indirect costs include sacrificed earnings. When you take a TSP loan, you sacrifice the earnings that might have accrued on the borrowed money, had it remained in your TSP account.
Although you pay the loan amount back to your TSP account with interest, the amount of interest paid may be less than what you might have earned if the money had remained in your TSP account.
Is there anything I'm missing? Do this sound like a reasonable use of a TSP loan?