TSP Loan? Yes! And Here Is Why…

I like the TSP. No, I LOVE the TSP! And you should too. However, when it comes to distributions from the TSP, you literally could not make it any more complex.

For this reason alone, it would be wise to roll your TSP over to an IRA upon separating from service, unless you really, and I mean REALLY, want to leave your heirs with a nightmare.

Now, when I say rollover to an IRA, I don’t propose you put it into a high cost fund or annuity. You can get similarly cheap investments at Vanguard and other places as TSP. But with those firms come much more flexibility in distribution options.

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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.”

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