Have You Ever Borrowed Again a Federal Retirement Account (Thrift Savings Plan)

Updated on April 28, 2011
N.S. asks from Muldoon, TX
9 answers

Have you ever done this? If so, what can you tell me about it? We're considering it in relation to a home purchase

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answers from Houston on

Are you talking about taking a loan from an active retirement account that will be paid back through deductions from your paycheck? If so, then the only thing you have to be aware of is that if for any reason while the loan is outstanding you no longer are employed by the company you will be responsible for paying the loan back or you will have to pay the income tax plus penalty tax for the outstanding amount. As long as you are employed and the payments are coming from your paycheck you do not pay any additional income tax or penalty taxes on the money.

The one taxation issue that some people get hung up on is the idea that the money was originally put into the account on a pre-tax basis but when you pay it back it will be after tax. Even though the repayments will be after tax, when you withdraw the money again once you retire you will be taxed. Some don't like the fact that you do get taxed on this money twice, but you are being allowed to use the money twice so it balances. All depends on how you look at it.

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answers from New York on

I know a few people who consistently borrow from their retirement but it is usually not a good idea to borrow today from your tomorrow. You would be better served increasing your income and saving the increase along with reducing your spending and saving the differnce. You would be surprized at how fast those little dollars add up.

Home ownership requires so much. The down payment is only the beginning.



answers from Austin on

I agree with those that say not to borrow against your future. That extra payment (with interest) will be yet another payment to add to your bills or take away from your income. It's better to save up the money for a down payment because it teaches you to get into the saving mode. Then once you have a down payment, you can keep saving for all those repairs, property taxes, improvements, maintenance and decor purchases that come up when owning a home. Most young homeowners do not have a savings account for all those extra costs and then get into financial difficulties when there is a major repair. If you have a loan to pay off, that is more reason to wait to purchase later.

All this talk about how great the prices are now means nothing if you cannot afford the house -- if you do not have a down payment, you cannot afford the house... This is not the economy to go beyond your limit and try to get a house that seems like a "good deal." It's not a good deal if you do not have a down payment and some money in savings to pay for the unexpected car repair, broken window (kids are kids), plane ticket to a funeral, etc.



answers from Boston on

Karen B has it right. You will not pay a penalty to borrow money, that's for taking a withdrawal. If your plan is a 401(k) (if you're a government employee then your plan is actually a Thrift plan not just a mis-named 401(k), which sometimes happens) you should be able to take primary residence loan, which allows you to spread payments over 10 years (15 for a true Thrift plan) instead of the normal 5 years. You will pay interest on the loan, usually prime plus whatever extra rate your employer specifies for the plan (the Thrift plan rate is indexed the performance of the government securities fund). The interest just goes back into your account - it's designed to deter people from taking loans that they don't need and to help make up for the lost earning from your money no longer being invested in the market. You can withdraw the lesser of up to 50% of your account balance or $50K.

As Karen mentioned, if you are fairly certain of your employment status and it makes good sense now to buy vs. waiting to save up the down payment, then a retirement loan can be a good decision. If you separate service, though, you generally have 90 days to repay the loan in full otherwise it is treated as a distribution and you have to pay taxes on it plus a 10% early withdrawal penalty. Owing income taxes on a withdrawal can be very, very painful at tax time and result in your owing a huge amount to the IRS.



answers from San Antonio on

don't borrow against your tomorrow! we took a TSP loan to pay off debt a couple years ago. first you DO pay taxes on that money b/c you are getting "paid" from the fund, so there goes 25% right off the top. we borrowed 20k, which is really 16k b/c of the taxes) the interest rate or repayment rate of the loan is very good, often better than the bank can do, so it is tempting, and your loan will be repaid, but 3 yrs later, the CCard debt is still there, we are looking at possible divorce, and our fund is not worth as much as it was before we took the loan. DO NOT DO IT! cut spending; go on a money diet - you will be amazed at how much $$ you have if you cut back and start truly tracking spending.



answers from Austin on

I have not but you should never borrow against your retirement. You will have a huge penalty up front plus whatever your tax rate is. So you are essentially taking a loan at 30-40% interest. Dumb idea. Better to save up the money to buy a house.



answers from Clarksville on

My husband and I have taken two small loans out of the TSP. All the money you take out is repaid to the TSP plan. My husband is getting medicially discarded from the Army and we will still make payments each month until the loan is paid off. Then when he reaches retirement age we will withdraw the money. For my family and our sitution it has helped us to take out a tsp loan. I wasn't worried about it affecting our retirement savings. By the time the loan is repaid back, I won't even be close to retirement age.


answers from St. Louis on

I can't find anything about whether interest is charged. You can take up to everything you have contributed out. There is no tax consequences, sorry momof3girls, unless you don't pay it back before you leave employment.

Your payments will automatically be deducted from your paycheck.

I don't have one, I am just googling this stuff. What I do know are 401k loans and what I have seen as a huge problem is people overextend themselves. You need to find out if a thrift loan is reported on your credit report, 401k loans are not. Because of this you can be approved for loans you really cannot afford.


answers from Beaumont on

bad idea. check out Suzie Orman.

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