down payment for home tsp loan or withdrawing from taxable

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Paul78
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Joined: Sat Dec 12, 2009 10:17 am

down payment for home tsp loan or withdrawing from taxable

Post by Paul78 »

I understand, generally speaking, you do not want to "rob" your retirement accounts to fund a housing down payment. But at the same time I do not wish to have 100k sitting in a bank account or very low risk investments when I am waiting to see if I will ever buy a house. Personally I would prefer to increase my taxable account now and have a smaller amount (no more than 50k) sitting around earning close to nothing.

If I then raid my taxable account to get the rest of the down payment the issue of capital gains or losses would come up. On the other hand if I take the 50k from my tsp those issues are avoided. Plus the fees are very low (the $50 administrative fee amounts to one tenth of a percent and the "interest" paid is not really a fee since it goes back into your tsp account). The day after the 50k is removed I would rebalance my tsp to get my overall asset allocation back to my prefer percentage.

Are there any major disadvantages from taking the money from the tsp instead of a taxable account? I know if you get fired or separate you have to pay the rest of the loan off (in that case I would just take it from my taxable accounts). Any other notable concerns?
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dm200
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Re: down payment for home tsp loan or withdrawing from taxab

Post by dm200 »

Paul78 wrote:I understand, generally speaking, you do not want to "rob" your retirement accounts to fund a housing down payment. But at the same time I do not wish to have 100k sitting in a bank account or very low risk investments when I am waiting to see if I will ever buy a house. Personally I would prefer to increase my taxable account now and have a smaller amount (no more than 50k) sitting around earning close to nothing.

If I then raid my taxable account to get the rest of the down payment the issue of capital gains or losses would come up. On the other hand if I take the 50k from my tsp those issues are avoided. Plus the fees are very low (the $50 administrative fee amounts to one tenth of a percent and the "interest" paid is not really a fee since it goes back into your tsp account). The day after the 50k is removed I would rebalance my tsp to get my overall asset allocation back to my prefer percentage.

Are there any major disadvantages from taking the money from the tsp instead of a taxable account? I know if you get fired or separate you have to pay the rest of the loan off (in that case I would just take it from my taxable accounts). Any other notable concerns?
Yes (In MY Opinion) -

The other disadvantage (as I view it) is that you lose the gains (or potential gains) on the "loan" amount. A TSP (or 401k) "Loan" is really NOT an actual loan. Nobody is "lending" anything. When you "borrow" that $50,000 from the TSP, the entire $50,000 comes from liquidating/selling $50,000 of the TSP holdings. So, if you took taxation issues completely out of the analysis, taking a $50,000 "loan" from your TSP would be identical to selling $50,000 of your investments. So, for example, if you would earn (say, just for an example) 10% per year on average TSP portfolio, you are LOSING 10% per year by liquidating the holdings when you take that "loan".
kaudrey
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Re: down payment for home tsp loan or withdrawing from taxab

Post by kaudrey »

I agree with dm200.

Although we often talk about taxes on this board, taxes shouldn't wag the proverbial "financial decision" dog In many cases. Saving on taxes can't always be the highest priority, and in this case, I don't think it should be.

Generally, if you are going to need money in less than 5 years, it probably shouldn't be invested in the stock market anyway. But, if you aren't sure of your timeline and OK with the risk of a down market, go ahead and invest, and just sell when you need the money.
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Paul78
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Re: down payment for home tsp loan or withdrawing from taxab

Post by Paul78 »

Yes (In MY Opinion) -

The other disadvantage (as I view it) is that you lose the gains (or potential gains) on the "loan" amount. A TSP (or 401k) "Loan" is really NOT an actual loan. Nobody is "lending" anything. When you "borrow" that $50,000 from the TSP, the entire $50,000 comes from liquidating/selling $50,000 of the TSP holdings. So, if you took taxation issues completely out of the analysis, taking a $50,000 "loan" from your TSP would be identical to selling $50,000 of your investments. So, for example, if you would earn (say, just for an example) 10% per year on average TSP portfolio, you are LOSING 10% per year by liquidating the holdings when you take that "loan".[/quote]


The 50k has to come from somewhere so I do not really look at is as investing losses...

it either has to come from

-me stashing away 50k in low risk low earning areas (checking, cds, ect). In this case I could be "losing" 10% per year by not having the 50k invested in taxable accounts

-my tsp account

-my taxable accounts

In all cases I am taking 50k out of some sort of investing. Thus the "losing 10% per year" is not really relevant. This 50k would also be for the 100k downpayment not to pay of the mortgage faster.
Topic Author
Paul78
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Joined: Sat Dec 12, 2009 10:17 am

Re: down payment for home tsp loan or withdrawing from taxab

Post by Paul78 »

kaudrey wrote:I agree with dm200.

Although we often talk about taxes on this board, taxes shouldn't wag the proverbial "financial decision" dog In many cases. Saving on taxes can't always be the highest priority, and in this case, I don't think it should be.

Generally, if you are going to need money in less than 5 years, it probably shouldn't be invested in the stock market anyway. But, if you aren't sure of your timeline and OK with the risk of a down market, go ahead and invest, and just sell when you need the money.
This is my current case. There are many scenarios where I would not even consider buying a house till retirement (30+ years from now).
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grabiner
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Re: down payment for home tsp loan or withdrawing from taxab

Post by grabiner »

dm200 wrote:The other disadvantage (as I view it) is that you lose the gains (or potential gains) on the "loan" amount. A TSP (or 401k) "Loan" is really NOT an actual loan. Nobody is "lending" anything. When you "borrow" that $50,000 from the TSP, the entire $50,000 comes from liquidating/selling $50,000 of the TSP holdings. So, if you took taxation issues completely out of the analysis, taking a $50,000 "loan" from your TSP would be identical to selling $50,000 of your investments. So, for example, if you would earn (say, just for an example) 10% per year on average TSP portfolio, you are LOSING 10% per year by liquidating the holdings when you take that "loan".
You can take the loan entirely from your G fund balance. (While the loan is allocated proportionately to the funds, you can reallocate by selling the G fund to buy stock funds, so that your stock balance is the same both before and after you take out the loan.) This is a particularly natural comparison because the loan interest is paid at the G fund rate.

As a simplified example, if you take out a $10,000 loan when the G fund is yielding 2%, and pay back the loan with interest at $10,200 the next year, you will have the same $10,200 in the G fund as if you had left the money there. Your only loss is the $50 fee for taking out the loan.

And since you have a large taxable account, you can sell that taxable account to cover your loan if you leave the government and are forced to pay back the loan early.
Wiki David Grabiner
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