I was requesting an inter-fund transfer to re-balance my tsp allocations when I came across this:

Intro

When you borrow from your TSP account, loan

payments (including interest) are deducted from

your pay and deposited to your TSP account. Although

you are restoring funds to your TSP account

during the life of the loan, those funds and

their earnings may not equal what you would

have had if you had not borrowed from your account.

Borrowing from your TSP account will

affect the final account balance available for your

retirement. The following examples illustrate the

effects of borrowing.

Residential Loans:

The Cost of Residential TSP Loans. Let’s assume

that you need to borrow $10,000 to purchase a

home, and that a mortgage loan is available from

your bank at 7% for 15 years. The monthly loan

payments (principal and interest) would be approximately

$90, and, over the life of the loan, you

would pay about $6,200 in total interest. But mortgage

interest is a tax-deductible expense on your

Federal income tax return, and so, if you are in

the 28% Federal tax bracket, the effective interest

cost of your loan would be reduced to about $4,500.

The $10,000 that remains in your TSP account —

because you borrowed from the bank —would

continue earning for the next 15 years. Let’s assume

that $6,000 of your account is invested in the

G Fund and $4,000 in the C Fund. Using hypothetical

compound annual rates of return of 8%

and 15% for the G Fund and C Fund,* respectively,

your TSP account would earn approximately

$41,600 over 15 years. Therefore, your “net earnings”

at the end of 15 years would be $37,100

($41,600 – $4,500) if you borrow from the bank.

Now, let’s suppose you borrow the $10,000 from

your TSP account instead of the bank. If you do,

you will not have to pay the $90 per month to the

bank, but you will also lose much of the $41,600

in earnings you otherwise would have received on

your TSP account. Also, the “interest” you pay

yourself for a TSP loan is not tax deductible.

To illustrate: If the TSP loan rate is 6%, you will

have to repay approximately $84 per month to

your account for 15 years. (As in the above example,

assume that your contribution allocation is

60% to the G Fund and 40% to the C Fund over

the 15-year repayment period, so that your repayments

go into the two funds in those proportions.)

At the end of 15 years, you will have restored your

TSP account balance to $10,000, but — using the

same G and C Fund annual rates of return as above

— you will have earnings of only about $27,500.

To offset the diminished TSP earnings somewhat,

the $6 savings between the monthly bank loan

payment and the monthly TSP payment ($90 – $84),

if invested at, say, 5% over 15 years, would be worth

approximately $1,500 to you — about $1,100 in

savings and about $400 in interest (after Federal

taxes of 28%). Therefore, your “net earnings” at

the end of 15 years would be $29,000 ($27,500 +

$1,500) if you borrow from your TSP account.

The difference between your earnings when you

borrow from the bank and your earnings when

you borrow from your TSP account is $8,100

($37,100 – $29,000), which is the cost of borrowing

from your TSP account.

**Personal Loans**The Cost of Other TSP Loans. If you need to

borrow money for some other purpose, it may be

less expensive to borrow from your TSP account

than to borrow from commercial sources.

For example, assume your best alternative to borrowing

from your TSP account is a 4-year personal

bank loan of $10,000 with a 15% interest rate,

which would require monthly payments of approximately

$278. You would pay approximately

$3,300 in interest over 4 years on this loan, which

is not tax deductible. Your TSP earnings on the

$10,000 that remain in your account ($6,000 invested

in the G Fund and $4,000 in the C Fund

over the term of the loan at the hypothetical compound

annual returns of 8% and 15%, respectively)

would be about $5,200 over the 4 years, for

“net earnings” of $1,900 ($5,200 – $3,300).

However, if you borrow $10,000 at 6% from your

TSP account to be paid back over 4 years, your

monthly payments will be about $235. In 4 years,

your account will be restored to $10,000, and you

will have earnings of approximately $3,900.

In addition, if you invest the $43 difference between

the monthly bank loan payment and the

monthly TSP payment ($278 – $235) at 5% over

4 years, you would have approximately $2,200 in

savings and interest (after Federal tax of 28%).

Your “net earnings” after 4 years would therefore

be about $6,100 ($3,900 + $2,200).

The difference between your earnings when you

borrow from your TSP account and your earnings

when you borrow from a bank is $4,200 ($6,100 –

$1,900). Thus, upon the assumptions given, it

would be less expensive to borrow from your TSP

account than from the bank.

Summary. Although the principal and interest you

pay back to your TSP account during the life of

your loan will restore funds to your TSP account,

there are costs of borrowing from yourself as illustrated

above. Be sure you understand the financial

effects of borrowing before proceeding with your

TSP loan.

Cliff Notes: They actually say that it may be less expensive to borrow a personal loan from your TSP than a bank. Granted when the numbers are changed this assumption can change, but I'm a little surprised they would even bring this up. Obviously I'm concerned with the personal loan vs the residential loan (I don't know if I pointed this out before, but I did take out a $6k residential loan to cover closing costs on my first house which was paid off like 6 years ago).

My current 12 month TSP performance is 3.56% I can take out up to and including $40k for 1.875% (I would only be interested in about $30k, as I think I stated above). The current APR on the ~$30k in debt is 7.476% (56.9% of debt at 8.99% + 43.1% of debt at 5.49%). So I'd be paying the bank for a total of $5,939 in interest (min payment of $600 for 54 months) vs $1,416 (min payment of $525 for 60 months). Oh, and the $1,416 in interest for my tsp loan gets put back in my tsp, not the bank's pocket.

What do I lose? Well we can't really tell the future so lets use my 12 month performance of 3.56%. Using a CD calculator for 60 months compounding monthly I would make $6,039. A difference of $100 (with a fairly large and probably incorrect assumption of a constant 3.56% compounding monthly. Also not counting the compounding of the slowly increasing repayment of approximately $1100/month back to the TSP via the loan, so in reality, this could be a net gain assuming the 3.56%).

This is dragging on, I've been typing/thinking about this for 30+ minutes and I don't even know if my math is correct. I'm not trying to justify anything here, I just wanted to play with the numbers. I still don't think the loan is the best option, but it does seem to have have a few benefits. 1 - not paying interest to banks, 2 - defined loan term, can't go beyond 60 months, can't not pay it, 3 - Initial monthly payments will be less until the cc min payments start to come down, 4 - a little peace of mind.

edit: The more I think about it the CD calculator with monthly compounding isn't really the right thing to use for stocks, but I'm not sure what else to do. At the same time I figured out an analogy. Taking out the loan would be the same as if I moved $30k to the G fund for the next 5 years. Only I'd avoid having to pay nearly $6k in interest on credit card debt. That's it. Moving money from stocks to bonds would carry the same risk of losing potential earnings from stocks, so if you take that out of the equation the only difference is that I don't pay that interest to the bank. Right?