TSP loans

[Keenster]

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I was wondering if anyone has borrowed from their tsp account in order toput moneyin other types of investments to make themselves more diversified. The current interest rate is 4.1%. I was thinking about taking a loan and investing directly in stocks and or real estate. It would be nice if the tsp powers that be would give us those types of options but I don't see that happening any time soon.

 

[Spaf]

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Keenster wrote:

I was wondering if anyone has borrowed from their tsp account in order toput moneyin other types of investments to make themselves more diversified. The current interest rate is 4.1%. I was thinking about taking a loan and investing directly in stocks and or real estate. It would be nice if the tsp powers that be would give us those types of options but I don't see that happening any time soon.

I don't know of anyone that has done that. It seems sort of counterproductive to pay interest on investment funds. If you want to go to other investments you could minimize the TSP investment to still get government matching, and savemoney for future investments.That is what I've done. I know others on the board have sister accounts to TSP.

Rgds Spaf

 

[cowboy]

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I believe that you should never steal from your investments and take out a loan. I have had some people tell me theyloan from their tsp to purchase vehicles. To me the cost is too great. First you put this money in and it is working tax free and if you take a loan out you lose that money working for you and then you have to use taxed money to replace it while you repay the loan. Then when you draw it out when you retire it is then taxed again.

If it was me and I wanted to make other investments, I would just cut my TSP to matching and then stick whatever was above that into a different investment, thereby diversifying your investments.

Real estate put so much away and save for the down payment. Think of it as you already have the loan on the TSP and your already paying it back, once you have saved that money then invest.

 

[Keenster]

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Thanks for the input. I currently put 15% into the tsp and I certainly could drop it down and have more to invest elsewhere. Are the advantages of saving pretax dollars not as great as I thought? I am by no means a pro at this but I remember personnel advertising the pretax benefits of investing in the tsp. Thanks again.

 

[cowboy]

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One thing about pretax dollars you do not know what you will be paying for a tax when you withdraw them. It is a very good way to save though as your investment builds on the tax free investment. An advantage of paying tax and then investing is it is available to you with usually no strings attached. There is good in both.

 

[Rolo]

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What an interesting idea!

If you are pretty sure you can, with your non-TSP investments, beat your TSP returns + 4.1%, then do it.

• You still get pre-tax savings since you are still contributing to TSP.
• Since your 4.1% interest is an expense to investing, you can probably deduct it, just as if it were margin interest.
• This may be a very good idea during bear markets, where the G fund is the only thing going; can you beat 8-10%? (G Fund return + 4.1%)
• Leverage: if you borrow $10K from TSP and place it in a margin account, you will have $20K to invest, which will double your return.

I never thought of this...I will keep this strategy in mind. I would highly recommend practising this first with a regularly funded brokerage account before you borrow TSP money to do it; you'll need the experience.

 

[cowboy]

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Rolo wrote:

What an interesting idea!

If you are pretty sure you can, with your non-TSP investments, beat your TSP returns + 4.1%, then do it.

• You still get pre-tax savings since you are still contributing to TSP.
• Since your 4.1% interest is an expense to investing, you can probably deduct it, just as if it were margin interest.
• This may be a very good idea during bear markets, where the G fund is the only thing going; can you beat 8-10%? (G Fund return + 4.1%)
• Leverage: if you borrow $10K from TSP and place it in a margin account, you will have $20K to invest, which will double your return.

I never thought of this...I will keep this strategy in mind. I would highly recommend practising this first with a regularly funded brokerage account before you borrow TSP money to do it; you'll need the experience.

It is interesting but I wouldn't suggest just everyone run out and use your TSP for Margin money to hopefully increase profit. If you did this you would still need to pay back the loan monthly with non-tax deffered money plus pay in your TSP tax deffered contribution. I woulddoubt thatyou could tax deduct the loan out of TSP but it would be interesting to know. A lot of people have went broke playing the margin game. It may work in a bear market but is it worth the risk of losing your savings. I would only play a margin with money you can afford to lose. Use your loose change first, as ROLO suggests and test the water as you will need experience and possibly lots of it.

 

[Rolo]

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cowboy wrote:

If you did this you would still need to pay back the loan monthly with non-tax deffered money plus pay in your TSP tax deffered contribution.

I don't know why that would matter...?

Any fees/expenses used for investing are tax deductible.

You are right...a lot can go wrong and you can blow your s--- the f--- up! (emphasis necessary ) I've had success with margin and a little with short-selling and, yes, you need to account for things not working as planned, even if it is temporary (have cash on hand).

 

[cowboy]

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I don't think they will allow you to expense your TSP interest as a tax deduction on the loan you took out. I am not sure but I don't see how itcould be tax deductable because it is tax free until withdrawn. Do you follow me?

 

[Rolo]

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cowboy wrote:

I don't think they will allow you to expense your TSP interest as a tax deduction on the loan you took out.

It is no different than deducting margin interest.



Investment Interest
When you borrow money and use the proceeds to buy taxable investment assets, the resulting interest is called investment-interest expense. The most common example: interest on broker-margin accounts.

You can deduct investment interest to the extent of your taxable investment income — from interest, dividends, short-term capital gains, certain royalties and the like. If you don't have enough investment income, the excess interest expense gets carried over to the following tax year. Hopefully, you'll have enough investment income in that year to claim your writeoff. If not, the carryover procedure happens all over again. And so on and so on.

You can also choose to treat all or part of your long-term capital gains as investment income. The upside of making this choice is it allows you to currently deduct more of your investment-interest expense. The downside is the amount of long-term gain treated as investment income gets taxed at your regular rate instead of the normal 20%.

If you have investment interest, complete IRS Form 4952 (Investment Interest Expense Deduction) to calculate your writeoff. You also use this form to indicate how much long-term capital gain, if any, you want treated as investment income.

What about interest on loans used to purchase nontaxable investments, like municipal bonds or muni-bond funds? Nondeductible. Logically enough, the government won't let you write off interest on debts used to generate income that goes untaxed.

So if your investing strategy calls for some borrowing, the tax-wise trick is to spend the debt proceeds to buy taxable investments and use cash to pay for the nontaxable ones.

Source: cowboy wrote:

I am not sure but I don't see how itcould be tax deductable because it is tax free until withdrawn. Do you follow me?

Those two are not related and are independent, the loan and the withdrawal.