Boghie
Well-known member
Let’s fire this up again
First, a loan is a loan is a loan. You will pay it back with money AFTER the Grasping Hand takes its chunk. In the example provided, a very pleasing and normal 35% combined Federal and State income tax rate. Conversely, you deposited the assets into your TSP account with money which never felt the mordida of the Grasping Hand. You are 35% ahead right there. And, if you are reviewing this board and poaching ideas you are probably making a 9% annualized return rather than the paltry ‘G Fund’ 2.5%.
The below uses the previous examples assumptions: 28% Fed tax, 7% State tax, 3.125% loan payback.
So, to initially put the $10,000 in your TSP account you had to put $10,000 into your TSP account. The math is very simple on this one, eh. Not so simple actually. Up to half of it is ‘free’ – that is, matching funds. Yippee….
Now you borrow that $10,000 from your TSP account and you get a payment plan. You get the honor of paying yourself 3.125% compounded interest for the benefit of using your own assets – actually, not a bad deal. We will assume a five year payback. It will cost you 180.24 per month to payback the hole in your TSP retirement account.
To be able to pay that $180.24 with after-tax money you will need $277.29 in gross (pre-tax) money. So, over five years, borrowing $10,000 in pre-tax contributed assets costs you $16,374 to replace in a post-tax world. This is just a slightly different angle on the previous discussion – taking it to a monthly payment.
Now, let us look at the earnings loss that the hole made. I will assume that you can earn 6% on average in a balanced TSP allocation. That $10,000 would have become $13,382.26. That $3,382.26 is the return you will not make once you take the loan. (The deal doesn’t look so bad if we have negative growth though – yuk, yuk).
Lastly, you get the honor of paying that 35% income tax (hopefully) again when the money is pulled out during retirement. So that $10,000 (inflation adjusted) provides $6,500 in after-tax cash.
Let us add it up:
But those thinking they should use a loan to invest outside of TSP must factor in the cost of paying it back after you spent a couple of years putting it in. You have to factor in the cash flow. Are you going to reduce your pre-tax TSP contributions to pay your post-tax loan back? You have to factor in the loss of compounding investment income. Thus, if you don’t make at least $9,756 in net gains in your post-tax investment over the five years you haven’t broken even. That’s a little more than an average annualized return of 14% - rather tough, and this example doesn’t include brokerage fees (poor gold bugs!!!) nor the fact that the additional $3,382 would accumulate earning for years.
To me, the opportunity to take a necessary loan at very low interest rates is an amazing benefit if I absolutely need the cash. But the secondary costs are huge and not the same as those in a conventional loan.
First, a loan is a loan is a loan. You will pay it back with money AFTER the Grasping Hand takes its chunk. In the example provided, a very pleasing and normal 35% combined Federal and State income tax rate. Conversely, you deposited the assets into your TSP account with money which never felt the mordida of the Grasping Hand. You are 35% ahead right there. And, if you are reviewing this board and poaching ideas you are probably making a 9% annualized return rather than the paltry ‘G Fund’ 2.5%.
The below uses the previous examples assumptions: 28% Fed tax, 7% State tax, 3.125% loan payback.
So, to initially put the $10,000 in your TSP account you had to put $10,000 into your TSP account. The math is very simple on this one, eh. Not so simple actually. Up to half of it is ‘free’ – that is, matching funds. Yippee….
Now you borrow that $10,000 from your TSP account and you get a payment plan. You get the honor of paying yourself 3.125% compounded interest for the benefit of using your own assets – actually, not a bad deal. We will assume a five year payback. It will cost you 180.24 per month to payback the hole in your TSP retirement account.
To be able to pay that $180.24 with after-tax money you will need $277.29 in gross (pre-tax) money. So, over five years, borrowing $10,000 in pre-tax contributed assets costs you $16,374 to replace in a post-tax world. This is just a slightly different angle on the previous discussion – taking it to a monthly payment.
Now, let us look at the earnings loss that the hole made. I will assume that you can earn 6% on average in a balanced TSP allocation. That $10,000 would have become $13,382.26. That $3,382.26 is the return you will not make once you take the loan. (The deal doesn’t look so bad if we have negative growth though – yuk, yuk).
Lastly, you get the honor of paying that 35% income tax (hopefully) again when the money is pulled out during retirement. So that $10,000 (inflation adjusted) provides $6,500 in after-tax cash.
Let us add it up:
- It cost you $10,000 to put it into TSP
- It cost you $16,374 to replace the $10,000
- It cost you $3,382 in earnings to use your $10,000
- You get to roll around in $6,500 (after tax) in gold coins at the Golden Pond retirement house
- It cost you $10,000 to put it into TSP
- You earn $3,382 over the 5 years (giving you $13,382)
- You get to roll around in $8,698 (after tax) in gold coins at the Golden Pond retirement house
But those thinking they should use a loan to invest outside of TSP must factor in the cost of paying it back after you spent a couple of years putting it in. You have to factor in the cash flow. Are you going to reduce your pre-tax TSP contributions to pay your post-tax loan back? You have to factor in the loss of compounding investment income. Thus, if you don’t make at least $9,756 in net gains in your post-tax investment over the five years you haven’t broken even. That’s a little more than an average annualized return of 14% - rather tough, and this example doesn’t include brokerage fees (poor gold bugs!!!) nor the fact that the additional $3,382 would accumulate earning for years.
To me, the opportunity to take a necessary loan at very low interest rates is an amazing benefit if I absolutely need the cash. But the secondary costs are huge and not the same as those in a conventional loan.
), you will be stuck paying income tax on that money twice. The first time when you pay back the principal and interest on the loan, the second time when you pay income tax on the distributions you receive during retirement.
