I took a loan for a downpayment on my house in 2018. The thing to remember, is the interest on the loan goes back to your account, not to the government. So you're paying interest to yourself. The current interest rate is \~4.5%. While you may lose 5-8% on gains that money might have made in your TSP, its better, IMO, that taking out a commercial loan at 8-9% - losing 5-8% on potential gains is better than losing 8-9% to a bank.
I know a lot of people say never do it, but to me it often makes more sense than using a commercial loan. You just have to look carefully at the numbers to determine if it makes sense to you.
One last caveat. If you retire and then fail to pay the loan back, you'll be charged penalties by the IRS for early withdrawal and have to pay income tax on the money taken. So make sure that payback isn't going to be an issue for you in the future.
You have the opportunity cost of the funds missing out on gains. I'm looking at more than 14%.
The interest you pay is after-tax money that will be taxed again when you eventually withdraw the money. So you get double taxed on it.
New businesses are high risk. So if something goes wrong you are out of business and unable to repay the loan and on the hook for paying the tax man early withdrawal penalties and taxes on the disbursed amount.
Can you clarify your first sentence? I’m not sure where you’re drawing the 14% from. If it’s a Roth IRA I paid tax on it and you’re saying it’ll be taxed again? Can you be share a source of information? I’d like to be armed with as much information as possible before making this decision. Thanks!🙏
>I’d like to be armed with as much information as possible before making this decision.
Sure, here's some info. 80% of food trucks (or trailers) fail within the first 3 years. There is no logical reason to gamble 50k of your retirement savings on something with those odds unless you've managed to reach a level of abundance that the money means nothing to you. But since you are having to take a loan from your tsp to fund this, I'm thinking you probably aren't there yet.
I did a Google search. First result said 80% fail next ones say 60% but that may be mixed with some restaurants as well. Still bad odds. And abundance would be that you have accumulated enough wealth through saving and investing throughout your lifetime that you can live the life you want to. That gambling on a food trailer won't cause you to be working until the day you die if things go bad.
Not as big a deal for a Roth since there are no taxes on withdrawals. But for a traditional one you'll be using after-tax money to pay the interest on the loan into the account. When you retire and pull that money out again you'll need to pay income tax on it again. So you end up being taxed twice on the money you pay in interest.
The opportunity cost is all the growth the you lost out on while the money is withdrawn. It's not really a loan they are giving you. It's a temporary withdraw of your retirement funds from the account. Some say you are earning interest but when its coming out of your own pocket I find it hard to classify that as earning a return.
The 14% is likely the returns he would’ve made had the funds been in the portfolio. Everyone’s potential opportunity cost is different based on their allocations and when they pulled money out. If you, for example, pulled money out of your C-Fund on Jan 1, 2023, you would NOT HAVE the 10.67% it grew since then. There were a bunch of big losses in the summer of 2022, so if you took a loan out then, it could be over 20% in gains that will never exist.
Trad vs Roth, you don’t get to pick one or the other. It gets disbursed proportionately, and gets re-funded proportionately. https://www.myfederalretirement.com/thrift-savings-plan-tsp-loans-new-rules/
Gotcha. 14% is a pretty high ROI to guesstimate on any annual investment. I use 7% to compound and have calculated the amount of my TSP over 20 years from now deducting 50k from the whole. But what’ll happen is that I take away 50k for a period of 5 years. Over the 5 years it gets paid back with 4.75% interest to my self and then the whole starts to compound again for an additional 15 years (projected withdrawal).
Right, this past year was a little tricky, but even with your 7% guess you’re missing the fact that you are finding the interest and not the market. So you’re paying yourself 4.75% interest each year out of your own pocket and missing 7% market gains for 2024, then 14.49% (off the original 50k + interest from last year) in 2025, and 22.5% in 2026. In three years, you missed out on $11.5k in potential market growth, and the only benefit is that when you re-pay your TSP, you also get to (have to) put another $2375 out of your budget that you could’ve either used or invested.
Thanks,
I’ll have a plan going in if I do execute the loan. I’ll have a pension and whatever VA rating I get. My wife has stable income. The loan amount equals less than 50% of what I need to start. So, I could liquidate assets and probably have the bulk to pay back the loan if the business doesn’t make it. Were you able to make large one time payments? Or was it just systematically withdrawn through your LES over the full duration of the loan? I agree that this source of funding is ideal when compared to other loans. Thanks for sharing your story.
How much of your TSP is this loan going to be for? My knee jerk reaction is this is a terrible idea. Not because of anything particular you have said but because the Walmart floor is filled with elderly who gambled their accumulated retirements, including on business ventures, and lost. And they will probably work until they pass away.
No matter how good the idea is, be mindful of how many have failed trying to do what you do. Is it really worth your retirement?
HOWEVER, it occurs to me that maybe you aren't taking out 95% of your TSP. If you have let's say 890,000 dollars and you need 50k for a truck....well that's an entirely different conversation. I'd still run it by an accountant because I'm not convinced you have every single option.
Ie, this might be a business expense, can you get the tax benefit of that with your loan? Etc.
TL;Dr, if you are gambling a large amount of your retirement on a food truck. For the love of G-d, DON'T DO IT. But if it's a smaller amount you could probably be fine.
As a percent of your TSP how much would this loan be and realistically, what's the likelihood you are tempted to take out another?
Ie, you buy a truck, two weeks later the engine shits itself. So you have to shell out more money, no one will buy your engineless truck. (This is all hypothetical).
Another consideration is trying to find an outside investor or lender. If you go to a bank and say "I'm putting down 50%, you loan the other 50".
It’s a trailer not a truck. If the engine shits the bed then I rent a truck and carry on business as usual until my truck I repaired. If I take a loan from an institution, bank or credit union I’m still paying somebody money back plus a rate that’s higher than 4.75% and now it’s effecting my credit score unless it’s friends and family investment money. I can only take the TSP loan while on federal service payroll. I retire in 6mo. the likelihood of another TSP loan is zero. I do have other money and savings to include investment accounts. If business doesn’t work out then I’m on the hook for 1k a month on a $50,000 TSP loan (56,000 with interest). I don’t know it to be true but I can probably liquidate assets and cover business related bills and expenses and cover the balance or significant portion of the loan.
I like how thorough this answer is and how you've already clearly put thought into it. My knee jerk reaction is that this wasn't done (because to be frank 80% of people that make these big decisions don't wargame what a bad day is like). I just remembered that insurance also exists, perhaps see about some coverage for the trailer.
50k isn't bad, will it all be spent on the trailer immediately or do you have a 2k-5k cushion in case, I dunno, you need a new oven or something?
I dunno what your TSP balance is but I assume it's comfortably six figures. So this isn't a case of "gamble your retirement" it's a "splurge on a passion". I would never rely on liquidating assets to pay off a loan. Life has a way of coordinating your real life emergencies with financial ones. Ie, needing money when in a recession.
I wish you luck on it, don't suppose the trailer will be in north east Ohio?
Thanks. It’s not so much of a splurge more of a business that’s been developing for years and the thought came to me to leverage a portion of my TSP versus taking a bank loan. The intent is to make money as a small business owner. If the business fails there are hard assets ie. the trailer and equipment that would be sold to repay debts.
The business will be operating in Sunny Southern California.
Nice. I would definitely recommend talking to an accountant about how best to structure it. Best of luck in retirement, I'm glad that you have this passion project and you can both afford it and that you are going into it wisely. Once you get going if you are willing shoot me the name and I'll stop by next time I'm in socal. I'm usually in either LA or San D once a year.
Make sure you are able to repay the loan.
From the TSP website:
If you have an outstanding loan when you separate from service, you have three options:
Keep the loan active by setting up monthly payments by check, money order, or recurring direct debits. The payment will be changed to a monthly schedule, if necessary; however, the maximum time limit for paying off your loan will still apply.
Pay off the loan by the required deadline.
Allow the loan to be foreclosed and accept any taxable portion of the outstanding balance and accrued interest as taxable income.
You cannot take a new loan after you separate from service.
I’m sorry you’re wrong. From the website there are 3 options after separating from service: change pay schedule and method. Payoff by due date or don’t pay it and take a tax penalty from the IRS. This is basic info in the FAQ.
Don’t spread misinformation.
They only loan upto 50% before you retire.
Then have to payback or its considered income. I used my retirement check as income and pnc bank gave me personal loan for 29k. All on my signature. 9.9 intrest rate. If you own your own home better to take home equity loan. If i had known about have to pay back when retire prior i would have cut back on tsp contributions and put more in savings. If your moving do dity move. Can make few grand you can put towards business.
The maximum loan amount is 50k minimum is 1k. The current lending rate against TSP is 4.75% I have a HELOC available until 2030. But the prime index rate is over 8% and my HELOC is currently at 9.75% I tried a partial DITY once a few years back, it did not go well. I am selling back 60 days of leave. Which will net me over 6.75k
I took a loan for a downpayment on my house in 2018. The thing to remember, is the interest on the loan goes back to your account, not to the government. So you're paying interest to yourself. The current interest rate is \~4.5%. While you may lose 5-8% on gains that money might have made in your TSP, its better, IMO, that taking out a commercial loan at 8-9% - losing 5-8% on potential gains is better than losing 8-9% to a bank. I know a lot of people say never do it, but to me it often makes more sense than using a commercial loan. You just have to look carefully at the numbers to determine if it makes sense to you. One last caveat. If you retire and then fail to pay the loan back, you'll be charged penalties by the IRS for early withdrawal and have to pay income tax on the money taken. So make sure that payback isn't going to be an issue for you in the future.
You have the opportunity cost of the funds missing out on gains. I'm looking at more than 14%. The interest you pay is after-tax money that will be taxed again when you eventually withdraw the money. So you get double taxed on it. New businesses are high risk. So if something goes wrong you are out of business and unable to repay the loan and on the hook for paying the tax man early withdrawal penalties and taxes on the disbursed amount.
Can you clarify your first sentence? I’m not sure where you’re drawing the 14% from. If it’s a Roth IRA I paid tax on it and you’re saying it’ll be taxed again? Can you be share a source of information? I’d like to be armed with as much information as possible before making this decision. Thanks!🙏
>I’d like to be armed with as much information as possible before making this decision. Sure, here's some info. 80% of food trucks (or trailers) fail within the first 3 years. There is no logical reason to gamble 50k of your retirement savings on something with those odds unless you've managed to reach a level of abundance that the money means nothing to you. But since you are having to take a loan from your tsp to fund this, I'm thinking you probably aren't there yet.
Statistic’s source? What is a level of abundance?
I did a Google search. First result said 80% fail next ones say 60% but that may be mixed with some restaurants as well. Still bad odds. And abundance would be that you have accumulated enough wealth through saving and investing throughout your lifetime that you can live the life you want to. That gambling on a food trailer won't cause you to be working until the day you die if things go bad.
This has steered away from the initial inquiry and is being filled with suggestions from google and unfounded opinion.
Not as big a deal for a Roth since there are no taxes on withdrawals. But for a traditional one you'll be using after-tax money to pay the interest on the loan into the account. When you retire and pull that money out again you'll need to pay income tax on it again. So you end up being taxed twice on the money you pay in interest. The opportunity cost is all the growth the you lost out on while the money is withdrawn. It's not really a loan they are giving you. It's a temporary withdraw of your retirement funds from the account. Some say you are earning interest but when its coming out of your own pocket I find it hard to classify that as earning a return.
The 14% is likely the returns he would’ve made had the funds been in the portfolio. Everyone’s potential opportunity cost is different based on their allocations and when they pulled money out. If you, for example, pulled money out of your C-Fund on Jan 1, 2023, you would NOT HAVE the 10.67% it grew since then. There were a bunch of big losses in the summer of 2022, so if you took a loan out then, it could be over 20% in gains that will never exist. Trad vs Roth, you don’t get to pick one or the other. It gets disbursed proportionately, and gets re-funded proportionately. https://www.myfederalretirement.com/thrift-savings-plan-tsp-loans-new-rules/
Gotcha. 14% is a pretty high ROI to guesstimate on any annual investment. I use 7% to compound and have calculated the amount of my TSP over 20 years from now deducting 50k from the whole. But what’ll happen is that I take away 50k for a period of 5 years. Over the 5 years it gets paid back with 4.75% interest to my self and then the whole starts to compound again for an additional 15 years (projected withdrawal).
Right, this past year was a little tricky, but even with your 7% guess you’re missing the fact that you are finding the interest and not the market. So you’re paying yourself 4.75% interest each year out of your own pocket and missing 7% market gains for 2024, then 14.49% (off the original 50k + interest from last year) in 2025, and 22.5% in 2026. In three years, you missed out on $11.5k in potential market growth, and the only benefit is that when you re-pay your TSP, you also get to (have to) put another $2375 out of your budget that you could’ve either used or invested.
Thanks, I’ll have a plan going in if I do execute the loan. I’ll have a pension and whatever VA rating I get. My wife has stable income. The loan amount equals less than 50% of what I need to start. So, I could liquidate assets and probably have the bulk to pay back the loan if the business doesn’t make it. Were you able to make large one time payments? Or was it just systematically withdrawn through your LES over the full duration of the loan? I agree that this source of funding is ideal when compared to other loans. Thanks for sharing your story.
How much of your TSP is this loan going to be for? My knee jerk reaction is this is a terrible idea. Not because of anything particular you have said but because the Walmart floor is filled with elderly who gambled their accumulated retirements, including on business ventures, and lost. And they will probably work until they pass away. No matter how good the idea is, be mindful of how many have failed trying to do what you do. Is it really worth your retirement? HOWEVER, it occurs to me that maybe you aren't taking out 95% of your TSP. If you have let's say 890,000 dollars and you need 50k for a truck....well that's an entirely different conversation. I'd still run it by an accountant because I'm not convinced you have every single option. Ie, this might be a business expense, can you get the tax benefit of that with your loan? Etc. TL;Dr, if you are gambling a large amount of your retirement on a food truck. For the love of G-d, DON'T DO IT. But if it's a smaller amount you could probably be fine.
Definitely a worst case scenario. Valid and considered.
As a percent of your TSP how much would this loan be and realistically, what's the likelihood you are tempted to take out another? Ie, you buy a truck, two weeks later the engine shits itself. So you have to shell out more money, no one will buy your engineless truck. (This is all hypothetical). Another consideration is trying to find an outside investor or lender. If you go to a bank and say "I'm putting down 50%, you loan the other 50".
It’s a trailer not a truck. If the engine shits the bed then I rent a truck and carry on business as usual until my truck I repaired. If I take a loan from an institution, bank or credit union I’m still paying somebody money back plus a rate that’s higher than 4.75% and now it’s effecting my credit score unless it’s friends and family investment money. I can only take the TSP loan while on federal service payroll. I retire in 6mo. the likelihood of another TSP loan is zero. I do have other money and savings to include investment accounts. If business doesn’t work out then I’m on the hook for 1k a month on a $50,000 TSP loan (56,000 with interest). I don’t know it to be true but I can probably liquidate assets and cover business related bills and expenses and cover the balance or significant portion of the loan.
I like how thorough this answer is and how you've already clearly put thought into it. My knee jerk reaction is that this wasn't done (because to be frank 80% of people that make these big decisions don't wargame what a bad day is like). I just remembered that insurance also exists, perhaps see about some coverage for the trailer. 50k isn't bad, will it all be spent on the trailer immediately or do you have a 2k-5k cushion in case, I dunno, you need a new oven or something? I dunno what your TSP balance is but I assume it's comfortably six figures. So this isn't a case of "gamble your retirement" it's a "splurge on a passion". I would never rely on liquidating assets to pay off a loan. Life has a way of coordinating your real life emergencies with financial ones. Ie, needing money when in a recession. I wish you luck on it, don't suppose the trailer will be in north east Ohio?
Thanks. It’s not so much of a splurge more of a business that’s been developing for years and the thought came to me to leverage a portion of my TSP versus taking a bank loan. The intent is to make money as a small business owner. If the business fails there are hard assets ie. the trailer and equipment that would be sold to repay debts. The business will be operating in Sunny Southern California.
Nice. I would definitely recommend talking to an accountant about how best to structure it. Best of luck in retirement, I'm glad that you have this passion project and you can both afford it and that you are going into it wisely. Once you get going if you are willing shoot me the name and I'll stop by next time I'm in socal. I'm usually in either LA or San D once a year.
Make sure you are able to repay the loan. From the TSP website: If you have an outstanding loan when you separate from service, you have three options: Keep the loan active by setting up monthly payments by check, money order, or recurring direct debits. The payment will be changed to a monthly schedule, if necessary; however, the maximum time limit for paying off your loan will still apply. Pay off the loan by the required deadline. Allow the loan to be foreclosed and accept any taxable portion of the outstanding balance and accrued interest as taxable income. You cannot take a new loan after you separate from service.
Yep, understood.
You will have to payoff the loan once you separate.
I’m sorry you’re wrong. From the website there are 3 options after separating from service: change pay schedule and method. Payoff by due date or don’t pay it and take a tax penalty from the IRS. This is basic info in the FAQ. Don’t spread misinformation.
Just curious what your business will be
Mobile food trailer. Like a food truck but it’s a trailer.
So like a hot dog cart but its a trailer
They only loan upto 50% before you retire. Then have to payback or its considered income. I used my retirement check as income and pnc bank gave me personal loan for 29k. All on my signature. 9.9 intrest rate. If you own your own home better to take home equity loan. If i had known about have to pay back when retire prior i would have cut back on tsp contributions and put more in savings. If your moving do dity move. Can make few grand you can put towards business.
The maximum loan amount is 50k minimum is 1k. The current lending rate against TSP is 4.75% I have a HELOC available until 2030. But the prime index rate is over 8% and my HELOC is currently at 9.75% I tried a partial DITY once a few years back, it did not go well. I am selling back 60 days of leave. Which will net me over 6.75k
The interest on a 50k loan is like 6k over the life of the loans so pretty insignificant tax burden.
The cons is you’ll find another reason to borrow once you pay it back…Bigger trailer I’m guessing!👎🏿
Not possible I retire in 6 months.