Suze Orman popularized the notion while discussing 401K accounts (which have the same tax treatment as the TSP) and this myth is widely spread across the internet. In the “Disadvantages” section of most websites which address TSP loans, the authors usually blindly copy some original source which incorrectly stated that taking a TSP loan results in paying taxes twice because the TSP account holder is moving tax-deferred assets into the taxable realm and after-tax income must be used to repay the loan. Any unpaid balance will be reported as a taxable distribution The “Double Tax” Myth of TSP Loans (4) If you leave Federal service, you must pay off the loan within 90 days of the date when your agency reports your separation to the TSP. Therefore, the TSP loan interest payments are not tax deductible, as they might be for a mortgage or home equity loan. (3) A TSP loan of either type is not a mortgage. An additional IRS early withdrawal penalty of 10 percent will be applied if the account owner is younger than age 59.5 at the time of the loan default. If you fail to pay off a TSP loan, income taxes on the “distribution” will be due. At the end of 15 years you would have $243,481. Compare that to $50,000 compounding at 10.6% (the stock market’s average rate of return over the past 25 years). ![]() Your nest egg would have grown by only about $9500 in 15 years, and nearly all of that money came out of your pocket. At the end of those 15 years you would have paid back $58,500 (and earned an additional $950 in interest on the principal after you paid it back). The inevitable result will be a smaller TSP balance at retirement, which will impact the way that you live out your golden years.įor example, lets say you took out a $50,000 residential property TSP home loan at the current interest rate of 2.125% and paid it off over 15 years. Removing funds from your TSP account can significantly affect its growth. The most powerful feature of a retirement plan like the TSP is the tax-deferred growth and compounding of earning. (1) The most significant disadvantage is missed opportunity. If a TSP loan borrower loses his or her job, retires or leaves federal service and is unable to pay off the loan balance, the unpaid balance will be classified as a distribution for which income taxes must be paid, but it will not show up on your credit report as a default. A TSP loan does not appear on your credit report, because it is not really a loan (you are using your own savings). (5) There is no negative impact on your credit score. Other types of loans require a more complex application process, a credit check and more fees. No one is turned down for a loan assuming sufficient employee contributions and earnings. (4) The TSP loan application is quick, easy and straightforward. (3) The fee charged for TSP loans is a very low, flat fee of $50. If you aren’t old enough, or are old enough but haven’t separated from federal service, you would have to pay this penalty if you withdrew the money outright. (2) You avoid the 10 percent penalty on early withdrawals from retirement accounts. So the loan is essentially free to you, other than a small administrative charge. (1) The interest rate is very low and you are paying it to yourself instead of to a bank. What are the advantages of Thrift Savings Plan loans?
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