TSP Loan

[AviationGuy]

Hello everyone. I am 29 years old married with 2 small children (3 and 1). I am currently the only one bringing in a paycheck but I make a decent amount in my field. I work for the federal government and will be eligible for a pension as well as the TSP (essentially a 401(k)).

I currently have about $25,000 in the TSP which I started when I got this job about 3 years ago. Unfortunately our family has stumbled upon a serious medical issue which has thrown us into about $12,000 in credit card debt. I'd like to not go into the details of that since the main topic I'd like to focus on is the financial part.

I never thought I should do this but I am contemplating a TSP loan of $10,000 to pay off the majority of the credit card. I know TSP/401(k) loans are usually very frowned upon which is why I'm asking for your opinion. It would be at a very low rate (less than 2%) and the interest I pay goes back into my account. I just feel like I am going to lose out on a few precious years of compounding interest in that account, but that credit card debt is seriously stressing me out and I'd love nothing more than to see it disappear.

Am I crazy for considering this?

 

[RunningBum]

I know a lot of people frown on this, but I think in this case it may be worth doing. The danger is using the TSP/401K as a way of financing a higher life style. That's not what you are doing.


I'm not sure you're even losing out all that much in the account. After you've paid it off, you've restored the capital, at a ~2% rate rather than whatever it would've made with your investments--which could be less.

 

[RE2Boys]

Sounds like a reasonable plan, but you would need the discipline to not default on the loan in any way. It would then be deemed as an early withdrawal and likely subject to the 10% penalty.

Another option would be to check out a local credit union that you may be eligible to join. In my area, an unsecured loan can be had for 5.25% (12 month loan). Higher rates for longer term loans. While greater than the 2% from TSP, I assume way less than credit card rates.

 

[jazz4cash]

Have you exhausted all other sources for a lower cost loan? There are lots of low rate balance transfer deals around these days.

If you do go with the TSP loan, I suggest you rebalance your fund allocations and take your fixed income allocation (if any at your age) to 0. This will minimize your opportunity cost unless of course the equity funds tank.

 

[braumeister]

Have you exhausted all other sources for a lower cost loan? There are lots of low rate balance transfer deals around these days.

I wouldn't knock you for taking the TSP loan either, but this is certainly another option. For example, I just got an offer the other day to transfer a credit card balance with 0% interest until about the middle of next year. You might check around for similar offers. Just an alternative.

 

[Red Badger]

As others have suggested, do look into every option before pulling from TSP. Along with balance transfer, etc, check into a consumer loan from your credit union or bank. Think of TSP loan as second to last resort (last being current CC debt).

Good luck.

 

[bingybear]

If you could transfer the debt to a CC with 0% interest and pay it off in the time allotted .. that would be better.

This all likely shows one thing missing in your financial planning.... that is the emergency fund. There are different rules of thumb for this, but 6 months to a years worth of expenses is a middle ground. Some say more, some less.

 

[plex]

I did something similar with a 0% slate card to finish off my highest interest rate student loans, had 15 months to pay it off, which was plenty of time. Saved about $600. It isn't hard to get unless you have bad credit.

TSP loans can be a very last resort. As others mentioned, an emergency fund would be good to keep in mind at the very least for later, the minimum I've seen suggested is 3 months living expenses. Personally I keep about that much in a checking account, and have Roth contributions as a second backup of about 1.5 years living expenses to avoid a huge tax hit year in an emergency.

 

[RunningBum]

I would borrow from a TSP before withdrawing from a Roth. The TSP will get paid back, albeit at a low rate. The Roth withdrawal would be gone from that very tax advantaged account for good.


The 0% credit card transfer sounds good if you can get it. At the end of the period of there is still a balance and you can't transfer it again, you could always take out a TSP loan for what's left, hopefully a much lower amount.

 

[Just_Steve]

I'm pretty sure there is a time frame that the TSP loan has to be paid back if not it is considered a disbursement and will be subjected to a 10% early withdrawal penalty.

 

[brucethebroker]

If you are invested in stocks, and borrow from the TSP, you will look brilliant should the market stumble in the near future..........if it does not, well, you will still be OK.

About 15-20 years ago, I took advantage of the no-penalty early withdrawal from IRA for funding college for kids. Less than a year later we had the .com crash......I felt pretty good about the timing on that one.

 

[Newventurer]

Sorry to hear of your medical situation.

One thought on the loan is that I believe they have to be paid back if you are to discontinue employment. If there is any risk that you would be ending the employment before the repayment period is up, could you come up with the funds to repay the remaining note?

 

[Pilot2013]

I have had to utilize 401K loan in the past (divorce). If you can't do a 0% balance transfer, I wouldn't hesitate IF the medical emergency is over. If you are still going to be paying large sums for this, you may have to consider other, more drastic options and you wouldn't want to be stuck with TSP loan issues. Also, you may have to forego contributions to your TSP for 6 months (or some period) as a result of taking a loan, so check on that as well. Good luck!

 

[CRLLS]

I looked into a 401K loan many years ago. The part I didn't like was if I became unemployed, it would be called and immediately due. This was something I couldn't accept.

I do have an insurance policy that I took a loan on once or twice at the time when interest rates were over 10%. I had a policy with a guaranteed loan rate of 6% APR and I didn't have to financially qualify. Just call them up and they sent a check. It was never "due" so if things got tough, I could delay my payback. And there were no monthly payments. While many dismiss anything but term life policies, I found this one to be a good tool.

Can you work out a payment plan with the medical community that is reasonable? That way the TSP is not possibly jeopardized.

 

[phil56]

Fwiw, I took out a TSP loan for about 6k in the early 1990s to buy our current home and paid back that loan over 5.5 years. Did we lose out? Yes, a bit but some years the market didn't do too well and others were pretty good. Fast forward to today.....I have retired, my TSP more than made up that lost ground as I maxed out my contributions later, especially once I hit 50. I have no regrets but everyone has a different situation. The loan will come due if you leave federal service so look into the implications of what you enter into. And, you may be able to spread the loan over a longer period. In my case, I wanted to pay it off as soon as possible while retaining the 5 percent match.