Author Topic: This is a dumb idea, right?  (Read 9499 times)

adam

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This is a dumb idea, right?
« on: February 22, 2012, 09:16:46 AM »
I know it is a dumb idea because everyone always says its the worst thing you could do.  Taking money out of your retirement (in my case, TSP) account and paying the taxes and penalties to pay off something else.

In my case, that something else would be about $30k in credit card debt split between a 5.24% card and a 1.99% card that is about to hit 8.99%.

My TSP's personal investment performance through 2011 (according to my end of year statement) is -3.67%

It has since gone up about $10k from the December 31st statement end date.  I could take out just about $30k to kill the credit cards, then I would have to pay back myself through additional automatic contributions at 1.5% interest.  Paying your tsp loan back is mandatory, not optional.

So pay off $30k at an average of 7.115% immediately, but you have to take it out of your retirement account.  The retirement account is doing pretty freaking awful.  Even now with $83,555 in it my rolling window of : Your Personal Investment Performance (PIP) for the past 12 months ending 01/31/2012 is 0.61%.  Obviously it has turned since I gained $10k in 2 months, and you want to be buying when the buying is good, but seriously.

If I take out the loan I will take the tax penalty, but I will get a guaranteed return of 1.5% on that money.  Of course that 1.5% comes out of my own pocket, and not the market's.  The maximum term is 5 years, so I'd be looking at a $520 payment for 5 years.  I'm currently paying $600, but the card with the larger balance is about to go to 8.99%, so that will go up.

I just had to go back and edit some things. The interest rate used to be 5%, now it is 1.5%.  So I guess the argument that paying myself back 5% will beat the market is moot.

Dumb idea?  I'm 31 if that matters. Edit: And neither of these two cards are the Marriott Visa I was referring to in the CC thread.
« Last Edit: February 22, 2012, 09:23:15 AM by adam »

tannybrown

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Re: This is a dumb idea, right?
« Reply #1 on: February 22, 2012, 09:33:18 AM »
I'm not clear on the tax implications.  It seems your income would be rising this year by $30k.  When you pay your account back, is it done with pre-tax funds?  (e.g. - if you could pay back all the $30k this year, would it be a wash re: taxes?)

adam

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Re: This is a dumb idea, right?
« Reply #2 on: February 22, 2012, 09:35:30 AM »
I think (and I might need to look this up), I pay taxes on the $30k immediately upon taking the loan. 

The money would be paid back with after tax dollars.

Guitarist

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Re: This is a dumb idea, right?
« Reply #3 on: February 22, 2012, 09:42:18 AM »
From my understanding, taking a loan out on your TSP is not as bad as other 401k plans but I would still avoid it. However, if you can guess a downturn in the market (I think you missed it though) it is not a bad idea if you do it right before the market drops. Basically you will be buying back shares at a lower price, increasing the affects of DCA'ing. But tell me when you can predict that kind of thing so I can ask you when to move from fund to fund

I use this site for a lot of my information regarding the TSP as well as discussion and ideas about the market in general. There will probably be a discussion about it or you can start a thread on the MB.

www.tsptalk.com

I am guessing you are a buy and holder. Not telling you what to do here, but if you get comfortable, I would recommend looking into being more active with your TSP (I think the limited IFT's and small number of funds make it easier to understand what you are doing, plus you aren't paying a fee for each transaction). Last year, the only fund that outperformed me was the F fund and not by much. Since not too many people sit 100% in the F fund all year, I consider it a pretty good year, it was also the first year I got away from buy and hold.

That being said, I don't recommend the same kind of strategy with an IRA or taxable account unless you really know what you are doing.

adam

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Re: This is a dumb idea, right?
« Reply #4 on: February 22, 2012, 09:47:18 AM »
This last year I may have made some small changes between S C and I, but typically I just re-balance once a month or so.  Currently I'm sitting at 45%S 35%C and 20%I

International is bombing pretty bad compared to the others.

tannybrown

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Re: This is a dumb idea, right?
« Reply #5 on: February 22, 2012, 09:54:05 AM »
I think (and I might need to look this up), I pay taxes on the $30k immediately upon taking the loan. 

The money would be paid back with after tax dollars.

If this is true, I would not do the deal.  Assuming you're in a relatively high tax bracket now compared to the tax bracket you'll be in when you retire, I can't see the transaction being positive.  The delta between your current/future tax rates + the 1.5% interest is likely larger than the savings you'll get from avoiding credit card interest.

Seems like a possible alternative is gaming the system via balance transfers to low APR cards.  The small transaction fees from the new card seem more palatable than taxes on $30k.

Guitarist

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Re: This is a dumb idea, right?
« Reply #6 on: February 22, 2012, 09:55:59 AM »
I think the I fund was outperforming the others for a bit. But usually when it's outperforming on the way up, it will "outperform" on the way down.

Having a negative year is going to happen. -3.67% is not that bad in the grand scheme of things. Take a look at '08.

adam

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Re: This is a dumb idea, right?
« Reply #7 on: February 22, 2012, 10:25:09 AM »
I think (and I might need to look this up), I pay taxes on the $30k immediately upon taking the loan. 

The money would be paid back with after tax dollars.

If this is true, I would not do the deal.  Assuming you're in a relatively high tax bracket now compared to the tax bracket you'll be in when you retire, I can't see the transaction being positive.  The delta between your current/future tax rates + the 1.5% interest is likely larger than the savings you'll get from avoiding credit card interest.

Seems like a possible alternative is gaming the system via balance transfers to low APR cards.  The small transaction fees from the new card seem more palatable than taxes on $30k.

I looked it up. I pay no taxes on the loan unless for some reason I refuse to pay it back, then it becomes "income" in the IRS' eyes.  So there is only a $50 fee to execute the loan, and then I pay it back at 1.5% to myself.

Quote
Having a negative year is going to happen. -3.67% is not that bad in the grand scheme of things. Take a look at '08.

Good point.

A big part of this is mental.  The wife and I are really feeling overwhelmed by a whole lot of things at the moment, and this could give us a little mental peace, maybe....

Its just one of those ideas that has been stuck in my head for a few months and I need to talk about it to work it out.

Guitarist

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Re: This is a dumb idea, right?
« Reply #8 on: February 22, 2012, 10:34:46 AM »
Yeah, what you found out sounds right. Like I said, if you think the market is about to drop, it is a great idea. But if you do it now and the market keeps gaining momentum, you will miss out on some gains. And it looks like you want to take out about 1/3 of your total TSP account, that is a lot of money.

So basically decide if you will beat the interest rate on the card plus the $50 fee. That is the big decision.

adam

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Re: This is a dumb idea, right?
« Reply #9 on: February 22, 2012, 10:50:27 AM »
At this point I am basically breaking even on total contributions.  Maybe I wait a month or two to see what the market is appearing to do.  But going back to the mental part, its a matter of certainty vs gambling almost.  I know for sure that paying out 1.5% interest for a loan to pay off $30k at 7.1% interest is mathematically sound.  The only problem comes from "what if".  What if the market goes up? I miss out on some money I can't touch till I'm 60.  What if I separate from federal service before I pay it off?  Well that is unlikely.

As for these two cards in particular? I have no idea where they are, they might already be cut up.  I only got them for the balance transfer option.  If I did this though, I would freeze my only active card as well as ensure the others are all destroyed.  Freeze as in I'm going to put it in a block of ice in the freezer.

30k @ 7.15% over 5 years is $5,769.68 in interest
30k @ 1.5% over 5 years is $1,157.80 in interest

So I would potentially save $4611.88 in interest.  Potential gains missed by $30k compounded over 5 years in this market?  Unknown.

Assuming I did this math correctly (which I probably didn't), assuming a steady 8% (because, I don't know, why not) gain over 5 years on $30k I could miss out on as much as $14,079 in gains.  That I can't use for 30 years.


adam

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Re: This is a dumb idea, right?
« Reply #10 on: February 23, 2012, 06:56:13 AM »
The wife says that if I think we should do it, she will be on board.  Which is good, because legally she has some right to my TSP apparently and has to also sign off on anything I do with loans.

adam

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Re: This is a dumb idea, right?
« Reply #11 on: February 23, 2012, 09:12:02 AM »
Another option we discussed was taking an $18k loan for the card that is about to hit 8.99% and keeping the $13k BOA card that is at 5.24%.

Stream of consciousness coming:
I feel like if we paid off those two cards with this TSP loan we would accomplish 3 things:
1) lower the interest paid significantly
2) force ourselves to pay that debt within 5 years (maximum length of loan), not to mention the payments being mandatory and automatic, I couldn't possibly miss one since it is taken straight from my paycheck.
3) Focus our 'snowball' towards the other outstanding debts, such as the car, clear all those out (except maybe student loans) and then re-focus on this loan and have everything taken care of in that 5 years (threshold), hopefully more like 3 (objective)

Part of this depends on if my wife gets a job when we move in the next 4-6 months.  If she gets a job making similar money our snowball could be $2500-$3000.  If she has to get just whatever job is available, or doesn't get one, I'm not sure we will actually have a snowball at all.  That is an unknown, which is another reason I like the idea of lowering the total monthly payment on $30k by $100 a month.

I'm not entirely sold on the idea yet, but part of me wants to do it.

tddoog

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Re: This is a dumb idea, right?
« Reply #12 on: February 23, 2012, 10:23:56 AM »
I just sent in my paperwork for a tsp loan to cover  about 15K in debt. I just got tired of looking at the balances on the debt and prefer it to be paid off where I don't have to manage  the debt and push it around on different cards to optimize the interest rate.  I think it is a good idea.  Don't underestimate the value of the psychological benefits. 

foodguy

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Re: This is a dumb idea, right?
« Reply #13 on: February 23, 2012, 10:11:08 PM »
There are two costs involved with an in-service TSP loan.  Opportunity costs in lost earning potential from the $30k that you withdraw and tax cost.

The opportunity costs are the $30k that you loose out of your retirement.  If $30k isn't in your account for 5 years, your math is almost correct in that you would loose somewhere over $10k (but not the full $14k as you will be contributing back the $30k over the 5 year period - after year one only ~$24k will be out, year two ~$18k, etc.)  However, those interest earnings that you lost will also not be able to make a return.  The power of compound interest has gone away.  The amount that this calculator estimates you'll loose because of the loan in your final TSP balance is somewhere over $40k:

http://www.bankrate.com/calculators/retirement/borrow-from-401k-calculator.aspx

I just drew up a quick excel spreadsheet and confirmed that $40k is the different between your TSP after 30 years.  If you take the loan, even with paying it back (and I didn't account for the interest costs of the loan) your TSP account is worth ~$2.2M.  If you don't take the loan, in 30 years it's worth ~$2.241M.  This assumes the full $17000 yearly contribution.

The tax cost is also an issue.  When you take a loan from your TSP, you pay that loan back with after tax dollars.  So you have to work hard enough to earn $1, and then after income tax get to keep ~$0.75 to $0.72 depending on your tax bracket.  This does not account for your state income tax.  Then, you repay your TSP loan with your remaining $.75.  When you turn around to take a withdrawal in 30 years in retirement, you are taxed yet again on that already taxed contribution.  While yes, the initial contribution to the TSP was tax free, rather than electing to pay tax on this money only once in retirement, with a TSP loan you are now electing to be taxed twice.  This can add up to an effective tax rate on your $30k of over 50% (depending on your income and tax bracket).

While immediate gratification of paying off the credit card debt sounds great, the long term affects and calculations really don't make sense (over 50% to your Uncle.... really?).  The $40k cost that I quoted over 30 years is only the lost opportunity costs and NOT the true cost considering tax implications.  I'm guessing it took quite a while to accumulate $30k in debt.  It won't go away overnight.

PM me your email address if you want the spreadsheet or numbers more specifically.

adam

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Re: This is a dumb idea, right?
« Reply #14 on: February 24, 2012, 08:58:09 AM »
Foodguy, I sent you a PM. 

I'm certainly in no rush here, although it would feel great to do this and have the cards paid off I know that there are larger implications to taking the loan.  But.... how does that saying go? Prior performance does not guarantee future success or something like that?  My TSP balance is essentially double what I have contributed over the years with agency matching and market returns, even with the last few awful years.  That seems surprising now that I type it out, both in that I haven't contributed as much as I expected, and in that it appears I got 100% return on investment?  That can't be right...

Wow, maybe it is.  I'm not contributing nearly as much as I thought I was.

arebelspy

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Re: This is a dumb idea, right?
« Reply #15 on: February 24, 2012, 09:00:41 AM »
But.... how does that saying go? Prior performance does not guarantee future success or something like that?

Typically it's "Past performance does not guarantee future results."

But close enough, same sentiment.  Just posting in case you genuinely were curious and asking.  :)
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Physics

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Re: This is a dumb idea, right?
« Reply #16 on: February 24, 2012, 09:07:28 AM »
It appears I got 100% return on investment?  That can't be right...

Wow, maybe it is.  I'm not contributing nearly as much as I thought I was.

Sorta depends on what you mean.  Is there twice as much money in there as your contributions?  Then yes that is a 100% gain... but over how many years?

Investment gains are usually quoted as average (or in more intellectually honest cases, annualized) returns per year.

A 100% gain in a year is a fantastic return, a 100% gain over 35 years is terrible, as that is really just a 2% annualized return.
« Last Edit: February 24, 2012, 09:10:50 AM by Physics »

Ben

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Re: This is a dumb idea, right?
« Reply #17 on: February 24, 2012, 09:21:02 AM »
Adam,

This may seem like a rude question, but are you spending less than you make right now? What does your savings rate look like? Have you been paying down the credit cards? If so, how much was the balance at during its peak, and how long have you been chipping away at it?

Washing away your credit card debt (with a HELOC or a TSP loan) may (or may not) make sense financially, but it can make you less motivated to pay it off quickly, and makes it easier to fall into the credit card 'trap' again.

Ben

adam

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Re: This is a dumb idea, right?
« Reply #18 on: February 24, 2012, 10:45:01 AM »
The return is over... call it 7 years, so you're right it isn't 100% per year but it is... what, 14%?  And 5% of that is matching, so 9% per year maybe? 

We are spending less, but there is no 'savings' because all the extra money goes to debt right now (outside of my TSP contributions which is 7% to get the 5% match).  From 1/1 to 2/17 we have paid down $3,287.12 in principle on our mountain of debt, we're trying to make that average to $2,000 a month or more.  Its a very long story, and I'm considering putting it in a Journal post. 

We bought stuff we shouldn't have obviously, but it could be much worse.  If you look at the last two years we have paid about $21k in debt, but we added 25-30k.

But that is one year of mistakes, and one year of fixing those mistakes.  If we take out the loan we will stop using the one cc we currently use (the ones with the balances are locked away somewhere already), to avoid getting into this trap again.  We had a high of 111k in non house debt early in the marriage, and here we sit a year and a half later at 110k, with those aforementioned "mistakes" in between.  And as they tend to be, those were fairly large ($$) mistakes.

Peak CC balance was $32k, it always hovered between $26k-$30k since March 2011. Current is $31k.  We have been making min payments while focusing on paying off the boat ($3k to go) while one of the cards still has a 1.99% intro rate.  Boat should be paid by April.

adam

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Re: This is a dumb idea, right?
« Reply #19 on: February 26, 2012, 06:21:05 PM »
We thought of another option.  Stopping my 7% contributions instead of taking out the loan and putting that money in an allotment straight to savings out of my paycheck.

I ran some numbers in spreadsheets and found that taking the loan out only accelerates our payoff by 1-2 months, which doesn't seem all that great.

Lars

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Re: This is a dumb idea, right?
« Reply #20 on: February 26, 2012, 08:34:25 PM »
Adam,

I would council against stopping your 7% contribution unless being debt free ASAP is very important. Based on the information you provided, continuing your contribution is the best option for your net worth.
As I figure it a $1000 contribution to TSP nets something like $1700 dollars in the TSP after employer match at a cost of $850 after tax income. That $850 contributed to your credit card debt gets you around $1000 ($850+$150 interest saved). Keep in mind these numbers are back of the envelope calculations with a lot of assumptions. 
Your $2000 a month toward debt is an great number. A couple of years of meeting your goal and that debt will be gone. I believe your success on keeping that goal in the face of the inevitable temptations and set backs will be far more important than stopping your contribution or getting a TSP loan.

adam

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Re: This is a dumb idea, right?
« Reply #21 on: February 27, 2012, 07:33:29 AM »
We want the debt paid off ASAP because we want to have a little mustache soon.

arebelspy

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Re: This is a dumb idea, right?
« Reply #22 on: February 27, 2012, 09:10:54 AM »
Throw all your extra cash at that debt then, but yes, taking it out of this account and being hit with penalties/fees/taxes to pay off such low interest debt is in fact a bad idea.  But do what will make you happy.
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Ben

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Re: This is a dumb idea, right?
« Reply #23 on: February 27, 2012, 10:27:51 AM »
Hi Adam,

I was thinking of 'savings rate' as including money spent on debt reduction beyond the minimum payments. $2000 a month towards principle repayment is an aggressive and promising attack, best of luck as you persevere!

Re: halting retirement contributions, I would discourage you from reducing your contributions below any level that gives you a match. Your ROI for this is far beyond the interest of your debt. Perhaps there is a middle way- reduce your TSP contributions from 7% to 5% (to take advantage of all that matching) and throw the other 2% at debt?

Under FERS you get 1% to TSP regardless of your contribution, 100% match on your first 3%, and 50% match on your next 2%? In other words, your employer 'gives' 1%, and 'matches' another 4% if you put in 5%. Or do you have a more unusual TSP arrangement?

My inclination would be to avoid the TSP loan and try to pay down the debt as aggressively as possible. But as Joe said, if you decide to do something that makes less sense financially because it motivates/encourages you towards financial independence, then at least you will be doing so with your eyes open and recognizing that this decision will probably cost you some money.

dahlink

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Re: This is a dumb idea, right?
« Reply #24 on: March 07, 2012, 11:37:09 AM »
There are a lot of replies to this post.  Depending on your situation you may be able to claim a financial hardship if depending  on the reason you took on the debt.

https://www.tsp.gov/planparticipation/inservicewithdrawals/financialHardship.shtml


Mrs MM

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Re: This is a dumb idea, right?
« Reply #25 on: March 07, 2012, 12:17:37 PM »
We thought of another option.  Stopping my 7% contributions instead of taking out the loan and putting that money in an allotment straight to savings out of my paycheck.

I ran some numbers in spreadsheets and found that taking the loan out only accelerates our payoff by 1-2 months, which doesn't seem all that great.

That seems like a good solution to me.  Personally, I would do that, even if there was a employer match.  MMM would tell you to do the math.

I would also look into taking it out of the account, if the math works out once you know about all of the consequences and tax implications of doing so. 

judgemebymyusername

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Re: This is a dumb idea, right?
« Reply #26 on: March 07, 2012, 12:54:30 PM »
We thought of another option.  Stopping my 7% contributions instead of taking out the loan and putting that money in an allotment straight to savings out of my paycheck.

I ran some numbers in spreadsheets and found that taking the loan out only accelerates our payoff by 1-2 months, which doesn't seem all that great.

That seems like a good solution to me.  Personally, I would do that, even if there was a employer match.  MMM would tell you to do the math.

I would also look into taking it out of the account, if the math works out once you know about all of the consequences and tax implications of doing so.

At the very least, knock your contribution down to 5% and dedicate the other 2% to your debt. Federal government only matches up to 5%. (100% match on first 3%, 50% match on the next two percent contribution.)

The Money Monk

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Re: This is a dumb idea, right?
« Reply #27 on: March 07, 2012, 02:48:02 PM »
From a traditional perspective, many may consider it to be a poor choice, but there is a LOT of utility to be had from getting out from under 30K in debt.

If your debt is averaging 7 percent or something, that means the money in your 401 k would have to get like 10% just to break even (cover the 7% and inflation) And that's only if you believe the government's numbers.

It is hard to put a price on the feeling of being debt free. I would do it.

Ben

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Re: This is a dumb idea, right?
« Reply #28 on: March 08, 2012, 09:05:45 AM »
Getting rid of debt is certainly a good thing, and frees up your monthly expenses substantially. But matching is a 50-100% rate of return instantly.


adam

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Re: This is a dumb idea, right?
« Reply #29 on: March 08, 2012, 12:13:27 PM »
I changed it to 1%, which gives me 3% total (1% me 1% automatic 1% match).  This way I'm not missing  out completely, but the extra money will go to debt.  I also changed my allotments: $260 rent, $1000 savings (for debt), and allowance from $300->$0.  These figures are per pay check (every two weeks).

adam

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Re: This is a dumb idea, right?
« Reply #30 on: April 17, 2012, 12:19:42 PM »
I was requesting an inter-fund transfer to re-balance my tsp allocations when I came across this:

Intro
Quote
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:
Quote
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
Quote
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?
« Last Edit: April 17, 2012, 01:54:55 PM by adam »

gooki

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Re: This is a dumb idea, right?
« Reply #31 on: April 17, 2012, 08:32:37 PM »
Do it.

gooki

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Re: This is a dumb idea, right?
« Reply #32 on: April 17, 2012, 08:33:30 PM »
And put your contributions back up so you get maximum match.

Ben

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Re: This is a dumb idea, right?
« Reply #33 on: April 19, 2012, 08:10:50 AM »
Adam,

Just to be direct:
-You are a relative newcomer to spending less than you make (we all start somewhere, and I'm pulling for you!).
-You've already shown a willingness to make the wrong decision by the numbers to 'feel' less in debt (by electing not to take the free money offered by the TSP match).
-A TSP loan may make you 'feel' less in debt (since your monthly debt payments can be lower and stretched out over more time), but could also help you pay it off quicker and cheaper if you stay very motivated and continue to throw $2000+ a month towards principal repayment.
-There is a chance you will fail to 'stay the course,' and your lifestyle will inflate back to the difference allowed by these deferred payments, your credit card balance will creep up, but you've now mortgaged your retirement savings too.

How much do you hate your debt? Is it a full-fledged emergency for you, or is it mildly uncomfortable, but not worth sustaining a MAJOR lifestyle change until you are out from under it?
http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

If there's ANY chance that you or your wife's enthusiasm for austerity will fade, I'd be cautious about clearing up more room on the credit cards to possibly start using again.

Ben

PS Despite my negativity above, the numbers would likely work out in your favor if you chose to go with the TSP loan to consolidate your debt and then pay it down aggressively without accruing any new debt. If this consolidation takes you out of 'emergency mode' for your finances, then I would advice against it.

James

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Re: This is a dumb idea, right?
« Reply #34 on: April 19, 2012, 08:24:31 AM »
Adam,

Just to be direct:
-You are a relative newcomer to spending less than you make (we all start somewhere, and I'm pulling for you!).
-You've already shown a willingness to make the wrong decision by the numbers to 'feel' less in debt (by electing not to take the free money offered by the TSP match).
-A TSP loan may make you 'feel' less in debt (since your monthly debt payments can be lower and stretched out over more time), but could also help you pay it off quicker and cheaper if you stay very motivated and continue to throw $2000+ a month towards principal repayment.
-There is a chance you will fail to 'stay the course,' and your lifestyle will inflate back to the difference allowed by these deferred payments, your credit card balance will creep up, but you've now mortgaged your retirement savings too.

How much do you hate your debt? Is it a full-fledged emergency for you, or is it mildly uncomfortable, but not worth sustaining a MAJOR lifestyle change until you are out from under it?
http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

If there's ANY chance that you or your wife's enthusiasm for austerity will fade, I'd be cautious about clearing up more room on the credit cards to possibly start using again.

Ben

PS Despite my negativity above, the numbers would likely work out in your favor if you chose to go with the TSP loan to consolidate your debt and then pay it down aggressively without accruing any new debt. If this consolidation takes you out of 'emergency mode' for your finances, then I would advice against it.

Reading your post I have the exact same thoughts, so I just want to fully support second Ben's comments.  Whether the TSP loan is right for you goes way beyond the financial implications.
Badassity is a journey, not a guided tour.

adam

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Re: This is a dumb idea, right?
« Reply #35 on: April 23, 2012, 01:40:23 PM »
We would cut up all but one of the credit cards. We already cut up her BP card after I paid it off earlier this month.

I would put my contribution back up to the full match %.

We will not have $2k a month to snowball any more if she doesn't have a job. That search is still ongoing.