Repay TSP loan or invest in taxable acct. for flexibility?

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Topic Author
LIGuy82
Posts: 194
Joined: Mon Apr 16, 2018 12:51 am

Repay TSP loan or invest in taxable acct. for flexibility?

Post by LIGuy82 »

Should I repay my TSP loan immediately or invest in my taxable account for flexibility?
I took a $30,000 loan from my TSP to make a down payment on an investment property instead of selling stocks and having to pay capital gains tax (loan details below). I know the loan’s true cost is opportunity cost, not the very low interest, which I pay back to myself. I have the cash to just pay it back now. Does it make better financial sense to repay the loan or invest that money in my taxable account and repay the loan over the next four years? My instinct is to just repay the loan and make my tax-advantaged account whole again, but maybe I am missing something. Appreciate your advice.

Initial Loan: $30,000
Loan Term: Five Years (Began NOV 2020; Ends NOV 2025)
Interest Rate: .075%
Remaining Balance: $13,919

Current Biweekly payment: $235
Payoff Date: NOV 2025
Interest Paid in 2025: ~$500
lakpr
Posts: 7675
Joined: Fri Mar 18, 2011 9:59 am

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by lakpr »

The choices in TSP plan are cheaper than what you can get in retail. If you are going to invest the money in stocks, you might as well repay the TSP loan and invest into the C fund instead. Same exposure to stocks, but now you gave no loan hanging over your head, and no tax drag in taxable account.

Yes, pay off the TSP loan.
retiredjg
Posts: 44348
Joined: Thu Jan 10, 2008 12:56 pm

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by retiredjg »

I would pay off the loan.

In my opinion, it is not wise to invest borrowed money hoping to make a little extra something. Sometimes it backfires and there is no good reason to take that risk. There is plenty of risk in ordinary vanilla investing. Unnecessary risk is....unnecessary.
Topic Author
LIGuy82
Posts: 194
Joined: Mon Apr 16, 2018 12:51 am

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by LIGuy82 »

retiredjg wrote: Thu May 13, 2021 4:18 pm I would pay off the loan.

In my opinion, it is not wise to invest borrowed money hoping to make a little extra something. Unnecessary risk is....unnecessary.
This sums it up perfectly. Thanks.
Fat Tails
Posts: 219
Joined: Wed Oct 30, 2019 12:47 am
Location: New Mexico

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by Fat Tails »

What you are essentially doing is borrowing from TSP to invest outside of TSP. I don’t see any benefit to this but there are some risks. If there is some glitch in making the payments, your loan will be declared a TSP distribution and you will have to pay income tax on it plus a 10% early withdrawal penalty. Plus, if you don’t pay enough pack each pay period you could lose the Gov match.

If it was me, I’d just pay back the loan and move on with life.

Good luck
“If you would be wealthy, think of saving as well as getting.” ― Benjamin Franklin
Topic Author
LIGuy82
Posts: 194
Joined: Mon Apr 16, 2018 12:51 am

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by LIGuy82 »

Fat Tails wrote: Fri May 14, 2021 12:27 am What you are essentially doing is borrowing from TSP to invest outside of TSP. I don’t see any benefit to this but there are some risks. If there is some glitch in making the payments, your loan will be declared a TSP distribution and you will have to pay income tax on it plus a 10% early withdrawal penalty. Plus, if you don’t pay enough pack each pay period you could lose the Gov match
Thanks for your comment. I found it easier to break this up by category to explain my thinking. I decided to write this out in case someone has a question in the future on the topic (e.g. does a TSP loan affect employer match).

Investing Outside TSP: I borrowed from my own TSP to invest the money in real estate versus stocks. It made sense to "borrow" the money and pay back minimal interest (to myself) instead of selling off equities to raise the cash for a down payment on the condo, since that would incur capital gains taxes. The money in TSP entered TSP pre-tax, was not taxed when "borrowed," and was not taxed when repaid. I set it up to pay back over five years (maximum length) via biweekly paycheck deductions of $235, knowing I would make extra payments to finish it off within a year.

Employer Match: TSP loan repay deductions do not impact employer match, which is based on biweekly deposits into TSP. I continued to contribute $750 biweekly in addition to $235 loan repay deductions.

Early Withdrawal 10% Penalty: There is no option to not repay the loan via automatic payroll deductions. A non-payment could only happen through a payroll error (see below), job loss, or some other very specific situations. So the early withdrawal penalty, while real, is very unlikely except in some very specific circumstances.

TSP Payroll Error: If there were a payroll glitch in making payments, my employer would fix it. Something similar recently happened when my $750 deposit into TSP did not process. I learned that the employer has 30 days to correct such an error, and once corrected, the deposit is made at the TSP fund price on the original intended date, not on the date the error was corrected -- good in my case, since the market went up. If I did not contribute 5% of my gross pay, then that and only that would affect the match.

TSP Misconceptions: There are a number of misconceptions on TSP in general, the most egregious of which is that TSP loans are double taxed, which is completely false. The only thing that gets taxed prior to withdrawals is the interest paid back to oneself. Another is that TSP is better or worse than a 401K. It is the same thing -- a vehicle to invest in a tax-deferred retirement account. What is different are the fund options. If your 401K offers VFIAX, EFA, and VB, then you can construct a near-identical allocation with marginally different expense ratios. If your 401K only has high-expense options, then the TSP would be superior. If your 401K has similar options to TSP as well as additional fund options, then it has more flexibility but is not necessarily superior since those funds would be redundant to a three-fund portfolio.
MrJedi
Posts: 745
Joined: Wed May 06, 2020 11:42 am

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by MrJedi »

I guess I'm not seeing why you would want to invest the extra cash into a taxable account rather than your tax advantaged TSP.
Topic Author
LIGuy82
Posts: 194
Joined: Mon Apr 16, 2018 12:51 am

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by LIGuy82 »

I do not plan to. I just wanted to make sure there was not a reason why I would put it into taxable instead of repaying the TSP loan that I had not considered.
Fat Tails
Posts: 219
Joined: Wed Oct 30, 2019 12:47 am
Location: New Mexico

Re: Repay TSP loan or invest in taxable acct. for flexibility?

Post by Fat Tails »

LIGuy82 wrote: Sat May 15, 2021 3:15 am
Fat Tails wrote: Fri May 14, 2021 12:27 am What you are essentially doing is borrowing from TSP to invest outside of TSP. I don’t see any benefit to this but there are some risks. If there is some glitch in making the payments, your loan will be declared a TSP distribution and you will have to pay income tax on it plus a 10% early withdrawal penalty. Plus, if you don’t pay enough pack each pay period you could lose the Gov match
Thanks for your comment. I found it easier to break this up by category to explain my thinking. I decided to write this out in case someone has a question in the future on the topic (e.g. does a TSP loan affect employer match).

Investing Outside TSP: I borrowed from my own TSP to invest the money in real estate versus stocks. It made sense to "borrow" the money and pay back minimal interest (to myself) instead of selling off equities to raise the cash for a down payment on the condo, since that would incur capital gains taxes. The money in TSP entered TSP pre-tax, was not taxed when "borrowed," and was not taxed when repaid. I set it up to pay back over five years (maximum length) via biweekly paycheck deductions of $235, knowing I would make extra payments to finish it off within a year.

Employer Match: TSP loan repay deductions do not impact employer match, which is based on biweekly deposits into TSP. I continued to contribute $750 biweekly in addition to $235 loan repay deductions.

Early Withdrawal 10% Penalty: There is no option to not repay the loan via automatic payroll deductions. A non-payment could only happen through a payroll error (see below), job loss, or some other very specific situations. So the early withdrawal penalty, while real, is very unlikely except in some very specific circumstances.

TSP Payroll Error: If there were a payroll glitch in making payments, my employer would fix it. Something similar recently happened when my $750 deposit into TSP did not process. I learned that the employer has 30 days to correct such an error, and once corrected, the deposit is made at the TSP fund price on the original intended date, not on the date the error was corrected -- good in my case, since the market went up. If I did not contribute 5% of my gross pay, then that and only that would affect the match.

TSP Misconceptions: There are a number of misconceptions on TSP in general, the most egregious of which is that TSP loans are double taxed, which is completely false. The only thing that gets taxed prior to withdrawals is the interest paid back to oneself. Another is that TSP is better or worse than a 401K. It is the same thing -- a vehicle to invest in a tax-deferred retirement account. What is different are the fund options. If your 401K offers VFIAX, EFA, and VB, then you can construct a near-identical allocation with marginally different expense ratios. If your 401K only has high-expense options, then the TSP would be superior. If your 401K has similar options to TSP as well as additional fund options, then it has more flexibility but is not necessarily superior since those funds would be redundant to a three-fund portfolio.
All my risks in my above comment came from the TSP.gov website and associated documentation. The TSP has gotten more user friendly over the years, so maybe the risks are not so concerning at this time.

Good luck.
“If you would be wealthy, think of saving as well as getting.” ― Benjamin Franklin
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