TOPICS
TOPICS
Borrowing From Yourself
Active participants in the government's 401(k)-style retirement savings plan have a benefit within a benefit. They can take out a low-interest loan, ranging from $1,000 to $50,000, on their savings and then pay themselves back.
As of Aug. 1, the interest rate for new loans from the TSP was 5 percent. That amount, which is determined by the return rate of the Government Securities (G) Fund, fluctuates. Current figures can be found on the TSP Web site. It's a fixed rate, meaning the rate you get at the time you take the loan is what you'll pay for its life.
At the end of June, there were more than 750,000 outstanding TSP loans worth more than $5 billion. The TSP in total has more than $180 billion in investments.
TSP loans are only available to currently employed participants with at least $1,000 in the fund. And there's a limit of two loans at a time.
Investors can take one general purpose loan and one residential loan. The first has to be repaid within five years but requires no special documentation. The second has a 15-year term but requires proof of the purchase or construction of a primary residence -- not a vacation home.
Participants can complete loan applications online, in the secure Account Access area of the TSP Web site. In some cases, applicants may be asked to send in a hard-copy form as well.
There's also a $50 fee for each loan you take out. TSP Executive Director Gary Amelio instituted the administrative fee in a deliberate effort to reduce the number of outstanding loans. Taking funds out of your TSP account means you aren't earning as much money toward your retirement, he notes. Amelio is proud of the fact that outstanding loans have steadily declined under his leadership.
A recently updated version of the TSP loan booklet includes this warning:
The Thrift Savings Plan was designed to provide you with income after you retire. The amount you will have in your account depends on the decisions you make -- how much you contribute, how you invest, and whether you take money out of your account before retirement.
How should participants calculate the cost-effectiveness of TSP loans? According to C. Sue Warner, a former personnel management specialist at the Internal Revenue Service who now teaches federal benefits seminars, employees should compare the difference in interest they would pay on a commercial loan to the TSP interest, and calculate those savings. They should then compare that amount to their potential earnings on TSP funds if they kept the money in the plan.
It's a guessing game to some extent, of course. Warner said employees should also consider the stage of their career. Because of compounding interest, money invested by younger employees will amount to more by retirement. So TSP loans could be more appropriate for mid- to late-career employees.
COMMENTS
- No it's not. If you borrow from it to buy your house, you avoid PMI (a gain) and pay less interest on your home (again, a gain). there's no tax on the money you've taken out, so you pay it back with interest in installments. When you've paid it back, you now own more equity in your home than you would have taking a second mortgage. The money you've lost is the earnings you would have earned on the funds while in the TSP, had they been there. But figuring that is difficult since the value of your home went up as well. So the net opportunity cost was difference between (foregone TSP earnings), (minus what you accrued in equity and avoided in PMI and future interest payments)= net opportunity cost. I wish we could pay back with pre-tax earnings, but that is not the case. borrower Posted October 1, 2007 4:06 PM
- Since loan payments are made from personal funds which have been taxed once already, are those same funds taxed again upon distribution? How is this different from 401K loans (“loans of last resort”) from non-governmental entities whose implicit costs are both non-performance from the funds on loan plus your current real tax burden (usually 20% - 30%). Is there some tax free basis created for taxed funds used to repay these loans or is the real costs just buried out of the line of sight for those not familiar with the mechanics of personal finances? Rob Posted August 24, 2006 8:48 AM
- While I’m like “Anonymous” in that I’m curious as to the destination of that $3 million dollar windfall, I’m just enough of a cockeyed optimist that am hoping the $50 is paying for the loan processing fees and not me. I also tend to agree with Rick in that such a loan is a last resort. But, if the $50 is a user-based fee, it’s covering the costs and any excess is being distributed righteously (and thus taking the wind from taxpayers’ sails). Well, I’ve said it before and I’ll say it again. I like options. I’ve had to cover a loan or two in my day. I don’t know about you, but what the heck are all those fees anyway? If I needed one, and I couldn’t find a better deal than this, this does seem like something we’d like to keep. Just one man’s opinion. Tip off. Tip Posted August 17, 2006 2:05 PM
