Arguments in FAVOR of Retirement Plan Loans

Should you borrow from your TSP? Yes! If you’re going to pay off other debt.

In this episode I walk you through how you calculate a TSP loan and when and why you should do it.

I’m working with a woman now, we’ll call her Sara, who has $30k outstanding on a Home Equity Loan and $20k outstanding on a car loan.

The monthly payments total around $850 or so.

Borrowing $50k from her TSP will pay both loans off AND the interest she was before paying to the bank will go to her. Her interest is based on the yield of the G Fund at the time she took the loan. Currently, that yield was 2.857% (7/20/2018). Weird because when I look at the yield of the 10 year Treasury Bond it’s almost identical! Crazy that. (No really, just go back to my G Fund video where I discuss the correlation between the G Fund and the 10 Year Treasury).

Even better for Sara though is that in 5 years her TSP loan will be completely paid off, yet she would still have had her Home Equity Loan balance.

In this case, she’ll free up nearly $900 a month. And have no debt. And that couple thousand of interest will have gone to her account, not the banks.

“But Josh, she can deduct the interest on her home equity loan!”
“Really…what if she doesn’t itemize. Oh by the way, even if she were deducting it that interest is costing her real money. Interest on her TSP loan is going to her.”

“But Josh, the markets do better than the loan she is paying herself. So, to take the money out of her TSP will hurt her return!”

“With that logic, you should have never have any equity in your home. You should be fully leveraged at all times.”

In this video I go over some of the objections about retirement plan loans.

These are the big ones:

* Money you borrow will be out of the market and thus not growing
* Why pay off a mortgage or equity line debt when that interest is tax deductible?
* What if I leave my employer before the loan is paid off?
* I’m paying the loan back with after tax money, only to have it taxed later when I take it out.

Retirement Plan Loans

Love to hear your comments as these are 4 main reasons I hear NOT to borrow against your 401k.

But while they all have SOME validiity, not to the extend that it seems EVERYONE is always saying “DON”T EVER BORROW AGAINST YOUR 401K,! ONLY FOOLS DO THAT!”

I disagree.

Here’s another post on this topic.

 

 

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