January 3, 2015 at 2:25 pm #15216
I am a GS12 with about $26,000 of credit card debt. Most of that is from medical expenses and a recent move across the country. My wife works also so we are able to pay around $2,200 a month. It should be paid off in about 13 months. I pay around $200 in interest each month. I am thinking about taking a TSP loan to pay off the credit card debt. Then I would make the $2,200 payment to my TSP and pay back the loan while paying myself interest instead of VISA. This just makes too much sense to my wife and I. Would a year of lost gains really have a huge effect on my overall retirement? I feel like the opportunity cost would be very small.January 4, 2015 at 1:59 am #15219
Let’s assume the next year is fairly average and your TSP returns 10 percent. And you are paying back in throughout the year, so the $26,000 isn’t even out for the entire year. All told, you might be forgoing perhaps $1500 in gains. I don’t think that’s going to set you back as much as paying 10% plus on the credit card debt, so I tend to believe this situation would be a good use of a TSP loan.
The TSP Allocation Guide www.TSPallocation.comJanuary 6, 2015 at 11:54 am #15249
Thank you for your response.January 8, 2015 at 7:22 pm #15271
There is a way to payback your loan quickly, and it’s something I used a few years ago. I took a loan for $5000 and was paying back about $60 per pay period. I was putting 10% towards my TSP at that time, what I did was reduce my allocation to 5% which what is matched and put the other 5% towards my loan in addition to the $60. I was able to pay the loan off in a shorter amount of time.January 16, 2015 at 1:30 pm #15333
One thing to consider is that when you take out a TSP loan, you will essentially be paying taxes on the amount twice.
You borrow tax deferred money, but you repay with after tax dollars. Then when you retire, you pay tax on your withdrawels, including the money that you payed your loan off with with after tax dollars. This should be something to keep in mind. The low interest rate looks tempting, but if you are paying say 25% tax rate on income, you must pay back $125 for every $100 principal and interest.
BLUF: When you take out a TSP loan, you pay off the loan with after tax dollars. When you retire, you pay taxes again.January 18, 2015 at 9:53 pm #15364
With respect to the tax issue, it is a wash. Yes, you have paid taxes on the money you pay the loan back with, but you paid zero taxes on the money you borrowed and spent. So in the end it is the same as paying taxes just once.
The TSP Allocation Guide www.TSPallocation.com
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