What so scary about TSP loans?

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VerbalK
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What so scary about TSP loans?

Post by VerbalK » Thu Nov 02, 2017 10:35 pm

LTLurkerFTPoster...

I'm buying a new house. Depending on some possible concessions and whether I go for negative points, I'm likely going to be about 10-20K short of 20% down. I have a couple options. I could get a gift from folks or inlaws. I could withdraw contributions from Roth. I could get an HEL or HELOC on current home where I have about 100K in equity. Or I could pull up to 50K from my TSP. I'm a 10+ career type, no plans of going anywhere. I know there are some other less than 20% loan options available, but none of them are going to get me the rate I got with provident via a broker.

For some reason, after reading these and other boards, I thought a TSP loan was some sort of financial mortal sin. But why? I use my TSP for a more conservative portion of my retirement portfolio than I do my Roth or taxable accounts. And since interest is paid back into your account, how is this anything other than a 0% "loan" with a $50 closing cost plus a few months/years of lost investment returns (assuming they are positive)? It now seems like a no brainer vs the other options (with the exception of the gift route, which ultimately would be a fate worse than death).

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tadamsmar
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Re: What so scary about TSP loans?

Post by tadamsmar » Fri Nov 03, 2017 9:59 am

VerbalK wrote:
Thu Nov 02, 2017 10:35 pm
LTLurkerFTPoster...

I'm buying a new house. Depending on some possible concessions and whether I go for negative points, I'm likely going to be about 10-20K short of 20% down. I have a couple options. I could get a gift from folks or inlaws. I could withdraw contributions from Roth. I could get an HEL or HELOC on current home where I have about 100K in equity. Or I could pull up to 50K from my TSP. I'm a 10+ career type, no plans of going anywhere. I know there are some other less than 20% loan options available, but none of them are going to get me the rate I got with provident via a broker.

For some reason, after reading these and other boards, I thought a TSP loan was some sort of financial mortal sin. But why? I use my TSP for a more conservative portion of my retirement portfolio than I do my Roth or taxable accounts. And since interest is paid back into your account, how is this anything other than a 0% "loan" with a $50 closing cost plus a few months/years of lost investment returns (assuming they are positive)? It now seems like a no brainer vs the other options (with the exception of the gift route, which ultimately would be a fate worse than death).
A literal gift would be better, no?

A TSP loan is not much of a sin. I think Dante might just put you in Purgatory for a while. Or maybe he'd put you in Limbo. Limbo is not a bad place, that's where he put Socrates. Technically, Limbo is the First Circle of Hell, but I think it's better than it sounds.

Dante would put timers down there in the burning lake with Brutus being eaten by the Devil for eternity.
Last edited by tadamsmar on Fri Nov 03, 2017 10:06 am, edited 4 times in total.

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mrc
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Re: What so scary about TSP loans?

Post by mrc » Fri Nov 03, 2017 10:03 am

If you leave government service, don't you have to pay back the loan then? Buying the house becomes a current employer lock in.

Loss of earnings, and the earnings on the earnings (compounding loss).

Otherwise, it works out OK for some.
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mxs
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Re: What so scary about TSP loans?

Post by mxs » Fri Nov 03, 2017 10:14 am

Gift would be best obviously. The problem with TSP loan (like any 401k loan) is if you leave the job you have to pay the loan back immediately. That, and the funds have to go to the G fund while you are in the loan period. Roth contributions doesn't have this restriction, but you are permanently losing the ability to have put that 10-20k in. You may be able to make it up with future contributions, but with growth that 10-20k can be pretty substantial after 20-30+ years.

Is waiting 6 months to a year until you have the funds a possibility? That may be the best option if you can wait it out.

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dm200
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Re: What so scary about TSP loans?

Post by dm200 » Fri Nov 03, 2017 10:17 am

While it is called a "loan", it is not really a "loan" as commonly understood. I believe calling it a "loan" is very misleading.

What it actually constitutes is a redemption and withdrawal from your investments - without any immediate tax consequences - and no tax consequences as long as you pay it back (repurchase investments).

Carefreeap
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Re: What so scary about TSP loans?

Post by Carefreeap » Fri Nov 03, 2017 10:21 am

I think it can be a good tool for some.

The real problem is for folks who are chronically borrowing from their retirement accounts. It generally indicates that they are living beyond their means. My family is like this and I have seen how it doesn't work out.

If you're an otherwise financially disciplined person and it appears that you've weighed the costs and benefits and still think it's your best option then that's what you should do. Ultimately you are the one who has to live with the consequences.

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tadamsmar
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Re: What so scary about TSP loans?

Post by tadamsmar » Fri Nov 03, 2017 10:32 am

I think the best course would be to get one of those improperly documented loans from your in-laws and then never pay them back. :twisted:

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Ketawa
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Re: What so scary about TSP loans?

Post by Ketawa » Fri Nov 03, 2017 11:06 am

I don't think anything is scary about them except for the requirement to repay it if you leave federal service. TSP loans are a tool to access funds in tax-advantaged accounts without any tax consequences.

I have taken two loans over the last five years. One was a residential loan to reach a 10% down payment for a conventional mortgage without PMI while I was maxing tax-advantaged savings. The other was a general loan so I could continue to max tax-advantaged savings while taking advantage of 5% prepaid card accounts in taxable since my cash flow did not allow me to do both. I have since paid back the general loan and am working on paying back the residential loan while still maxing tax-advantaged accounts.

TSP loans are not really loans. My outstanding TSP loan is nothing more than a commitment to invest that comes with a penalty if I don't fulfill it.
mxs wrote:
Fri Nov 03, 2017 10:14 am
Gift would be best obviously. The problem with TSP loan (like any 401k loan) is if you leave the job you have to pay the loan back immediately. That, and the funds have to go to the G fund while you are in the loan period. Roth contributions doesn't have this restriction, but you are permanently losing the ability to have put that 10-20k in. You may be able to make it up with future contributions, but with growth that 10-20k can be pretty substantial after 20-30+ years.

Is waiting 6 months to a year until you have the funds a possibility? That may be the best option if you can wait it out.
Investing and contributions are not restricted to the G Funds while you have a loan. You have the same control over the TSP account. Contributions and loan repayments are both invested according to the account owner's contribution allocations.

Regarding your suggestion of the OP waiting 6 months until funds available are outside of the TSP, that doesn't really solve anything. Where will the funds come from?

1. Don't make taxable investments. Instead, the OP can take the TSP loan now, refrain from taxable investing, and accelerate payback over the next 6 months. Problem solved and the OP can make the down payment now.
2. Reduce TSP contributions. Instead, the OP can take the TSP loan now, reduce TSP contributions, and accelerate payback of the loan. Problem solved and the OP can make the down payment now.
3. Take contributions out of Roth IRA. This actually would not be a bad idea if the OP was facing a higher marginal tax rate than estimated in retirement and is otherwise unable to max tax-advantaged accounts now if the OP takes a TSP loan. The OP could use this opportunity to increase tax deductions now and pay less in retirement. But if the OP is maxing tax-advantaged accounts anyway, this doesn't help and reduces tax-advantaged space. (This is a strategy to consider regardless of whether the OP needs a TSP loan).

Assuming the funds are needed now and the other risks associated with the TSP loan are low for the OP, a TSP loan is a great option.

BackOfTheNet
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Re: What so scary about TSP loans?

Post by BackOfTheNet » Fri Nov 03, 2017 11:13 am

If you have enough money in the G fund you could switch your allocations such that your earnings should not change.

For example if you had:

$150,000 C Fund
$50,000 G Fund (Paying 2.25% guaranteed)

Make a change to $200,000 C Fund. Then take the $50,000 loan. Now you have

$150,000 C Fund
$50,000 loan to yourself (Paying 2.25% guaranteed)

wilked
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Re: What so scary about TSP loans?

Post by wilked » Fri Nov 03, 2017 11:26 am

VerbalK wrote:
Thu Nov 02, 2017 10:35 pm
LTLurkerFTPoster...

I'm buying a new house. Depending on some possible concessions and whether I go for negative points, I'm likely going to be about 10-20K short of 20% down. I have a couple options. I could get a gift from folks or inlaws.
Take the free money!

mxs
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Re: What so scary about TSP loans?

Post by mxs » Fri Nov 03, 2017 11:37 am

Ketawa wrote:
Fri Nov 03, 2017 11:06 am

Investing and contributions are not restricted to the G Funds while you have a loan. You have the same control over the TSP account. Contributions and loan repayments are both invested according to the account owner's contribution allocations.

Regarding your suggestion of the OP waiting 6 months until funds available are outside of the TSP, that doesn't really solve anything. Where will the funds come from?
The loan amount is effectively in the G fund. Maybe that fits with where the OP has their money anyway, and wouldn't be so bad. If not, it is a change that should be noted.

The difference with the 6 months is that there is a risk difference. A TSP loan is an option, but it may not be for everyone.

Jayhawk11
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Re: What so scary about TSP loans?

Post by Jayhawk11 » Fri Nov 03, 2017 12:28 pm

It's a lot safer than most 401k loans because you're very unlikely to be fired once you have civil service protections. That makes the really scary thing (losing your job and owing a huge loan at the same time) much less scary! Especially as it seems that OMB's guidance is to decrease the size of Federal service through attrition and a hiring freeze instead of a reduction in force.

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Earl Lemongrab
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Re: What so scary about TSP loans?

Post by Earl Lemongrab » Fri Nov 03, 2017 12:37 pm

mxs wrote:
Fri Nov 03, 2017 10:14 am
The problem with TSP loan (like any 401k loan) is if you leave the job you have to pay the loan back immediately.
There is no legal requirement for that and some plans don't do it. At Megacorp they allow you to keep the loan, although you obviously don't pay out of salary. The TSP does require that as I recall.
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Ketawa
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Re: What so scary about TSP loans?

Post by Ketawa » Fri Nov 03, 2017 2:06 pm

mxs wrote:
Fri Nov 03, 2017 11:37 am
Ketawa wrote:
Fri Nov 03, 2017 11:06 am

Investing and contributions are not restricted to the G Funds while you have a loan. You have the same control over the TSP account. Contributions and loan repayments are both invested according to the account owner's contribution allocations.

Regarding your suggestion of the OP waiting 6 months until funds available are outside of the TSP, that doesn't really solve anything. Where will the funds come from?
The loan amount is effectively in the G fund. Maybe that fits with where the OP has their money anyway, and wouldn't be so bad. If not, it is a change that should be noted.

The difference with the 6 months is that there is a risk difference. A TSP loan is an option, but it may not be for everyone.
The loan amount is not effectively in the G Fund, because you are paying the "interest" to yourself. The interest rate basically doesn't matter. For example, pretend the interest rate is 100%. You take a TSP loan of $50K and have to pay back $100K in one year. Is this opportunity to make an investment at a guaranteed 100% interest rate a boon to you? Absolutely not. Well, at least not in the way we think of investing in a savings account that makes 100%.

In the case of a loan from an TSP account that was Roth it could be a way to pack a lot of tax-free dollars into the account, assuming you could make the extra payments. If the account was Traditional, it would be like making non-deductible contributions to a tax-deferred account, which is worse than simply investing in a taxable account in most cases.

In no way is the loan "invested" in the G Fund. A 100% interest rate is an extreme example; realistic values are somewhere else on the spectrum. The same principles apply.

Carefreeap
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Re: What so scary about TSP loans?

Post by Carefreeap » Fri Nov 03, 2017 3:37 pm

wilked wrote:
Fri Nov 03, 2017 11:26 am
VerbalK wrote:
Thu Nov 02, 2017 10:35 pm
LTLurkerFTPoster...

I'm buying a new house. Depending on some possible concessions and whether I go for negative points, I'm likely going to be about 10-20K short of 20% down. I have a couple options. I could get a gift from folks or inlaws.
Take the free money!
They are rarely free. And expect it to come up at every holiday about how they helped you. Interest on a "real" loan is cheaper and you can actually pay off the "debt".

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White Coat Investor
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Re: What so scary about TSP loans?

Post by White Coat Investor » Fri Nov 03, 2017 3:50 pm

VerbalK wrote:
Thu Nov 02, 2017 10:35 pm
LTLurkerFTPoster...

I'm buying a new house. Depending on some possible concessions and whether I go for negative points, I'm likely going to be about 10-20K short of 20% down. I have a couple options. I could get a gift from folks or inlaws. I could withdraw contributions from Roth. I could get an HEL or HELOC on current home where I have about 100K in equity. Or I could pull up to 50K from my TSP. I'm a 10+ career type, no plans of going anywhere. I know there are some other less than 20% loan options available, but none of them are going to get me the rate I got with provident via a broker.

For some reason, after reading these and other boards, I thought a TSP loan was some sort of financial mortal sin. But why? I use my TSP for a more conservative portion of my retirement portfolio than I do my Roth or taxable accounts. And since interest is paid back into your account, how is this anything other than a 0% "loan" with a $50 closing cost plus a few months/years of lost investment returns (assuming they are positive)? It now seems like a no brainer vs the other options (with the exception of the gift route, which ultimately would be a fate worse than death).
Like any 401(k) loan the issue is what happens if you lose your job. Right at a time when you need the extra cash, you no longer have employed income AND you have to pay that loan back all of a sudden. People in such precarious financial positions that they need to borrow against the 401(k) to get a down payment are precisely the people most at risk in a job loss scenario.

It's a risk, like anything, so do it if you like, but I'd probably explore some other options first like that gift or just waiting to save up a little more.
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delamer
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Re: What so scary about TSP loans?

Post by delamer » Fri Nov 03, 2017 4:06 pm

If you have $200,000 in your TSP and are taking out a $20,000 loan, and continuing to contribute to get the match, then you are not severely impacting your retirement or your current finances.

If you have $40,000 in your TSP and are taking out a $20,000 loan, plus cutting your contributions to below the match, that is a different story.

Also, the fact that the OP has different options to get the money is a good sign. When a TSP/401(k) loan is your only option, that is a bad sign.

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grabiner
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Re: What so scary about TSP loans?

Post by grabiner » Fri Nov 03, 2017 9:15 pm

VerbalK wrote:
Thu Nov 02, 2017 10:35 pm
For some reason, after reading these and other boards, I thought a TSP loan was some sort of financial mortal sin. But why? I use my TSP for a more conservative portion of my retirement portfolio than I do my Roth or taxable accounts. And since interest is paid back into your account, how is this anything other than a 0% "loan" with a $50 closing cost plus a few months/years of lost investment returns (assuming they are positive)? It now seems like a no brainer vs the other options (with the exception of the gift route, which ultimately would be a fate worse than death).
The TSP loan is essentially a loan at the G fund rate. If you take your loan from money which was otherwise in the G fund, your TSP balance will be the same once the loan is paid off as if you had left the money there. The current yield of the G fund looks like about 2.2%, and it would be a 15-year loan. This is about the same as the after-tax rate you would get on a 15-year mortgage. Therefore, the TSP loan is likely to be a reasonable deal.

If you have "no plans of going anywhere", you shouldn't take negative points on the loan unless you need them to get to 20%; you'll pay more in interest than the value of those points. The bank charges points for a rate adjustment based on how long it expects the average borrower to keep the loan, so if you expect to keep the loan longer than average, you should pay more points.
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Buford T Justiice
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Re: What so scary about TSP loans?

Post by Buford T Justiice » Sat Nov 04, 2017 4:32 pm

Just a simple point: your repayment of the loan each pay period does not constitute pre tax contributions to the TSP.

Some feds learn this the hard way.

FedGuy
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Re: What so scary about TSP loans?

Post by FedGuy » Sat Nov 04, 2017 5:58 pm

grabiner wrote:
Fri Nov 03, 2017 9:15 pm
If you take your loan from money which was otherwise in the G fund, your TSP balance will be the same once the loan is paid off as if you had left the money there.
Well...not quite. You can expect the G Fund rate to change over time, but your TSP loan will remain at the same interest rate--the G Fund rate when you took out the loan--for the life of the loan. So, if you take out a TSP loan when the G Fund is paying 2.25%, and then the G Fund rate increases to 3.0%, you'll be paying back your TSP loan at an interest rate of 2.25% but the money you withdrew when you took out the loan would have otherwise been earning 3.0% interest. In this case, your TSP balance will be lower, even after you've fully repaid your TSP loan, than if you had just left the money in the G Fund.

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jjg247
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Re: What so scary about TSP loans?

Post by jjg247 » Sat Nov 04, 2017 6:30 pm

Buford T Justiice wrote:
Sat Nov 04, 2017 4:32 pm
Just a simple point: your repayment of the loan each pay period does not constitute pre tax contributions to the TSP.

Some feds learn this the hard way.
Your comment confuses me. A TSP loan is a non-taxable event as long as it is repaid as agreed. The dollars you receive are not taxed, why would someone get to pay it back with pre-tax dollars? Apologies if I misunderstood.

delamer
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Re: What so scary about TSP loans?

Post by delamer » Sat Nov 04, 2017 6:36 pm

jjg247 wrote:
Sat Nov 04, 2017 6:30 pm
Buford T Justiice wrote:
Sat Nov 04, 2017 4:32 pm
Just a simple point: your repayment of the loan each pay period does not constitute pre tax contributions to the TSP.

Some feds learn this the hard way.
Your comment confuses me. A TSP loan is a non-taxable event as long as it is repaid as agreed. The dollars you receive are not taxed, why would someone get to pay it back with pre-tax dollars? Apologies if I misunderstood.

My guess is that some people think that any money they put in their TSP is pre-tax, even a loan repayment. Would not surprise me; people just don't understand or think through financial decisions.

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Re: What so scary about TSP loans?

Post by FedGuy » Sat Nov 04, 2017 9:59 pm

jjg247 wrote:
Sat Nov 04, 2017 6:30 pm
Your comment confuses me. A TSP loan is a non-taxable event as long as it is repaid as agreed. The dollars you receive are not taxed, why would someone get to pay it back with pre-tax dollars? Apologies if I misunderstood.
I think the point is that repayments are made with after tax money. Some people assume that, because it's going into their TSP, repayments will be deducted before taxes are taken out on the remainder, but that's not the case.

VerbalK
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Re: What so scary about TSP loans?

Post by VerbalK » Mon Nov 06, 2017 1:44 pm

Thanks, I went ahead an applied for the max amount since I can reamortize it after I figure out exactly what I need. Since, I have more than 50K in the G funds now (out of 300K), I'm basically viewing this as pretty good deal. I understand the opportunity costs, but the money would have to come from somewhere right? Basically I'm rebalancing some of my retirement funds from G fund to real estate.

And sure, free gifts are great, but gifts from family are rarely truly free... and this would be from inlaws to boot.

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