Why Did I Borrow From My Pension Plan?

Do some on-line study about borrowing or taking out a loan from your 401(K) strategy and you’ll see about 99% of the sites you go to will tell you to by no means borrow money from your pension.

So, why did I borrow from mine? I will tell you.

First, mine isn’t a 401(K). It’s similar and called a TSP – Thrift Savings Strategy. It’s run by the US Government and is one of the largest pension plans in the world.

I wanted to invest in some property and looked at my options. My first option was a house equity line of credit. I have a condo now for about 20 years so I’ve some equity in it. My credit is good, and it was an easy acceptance from the lender.

The issues were the fees and interest rate.

The interest rate was really decent but the fees were in the thousands of dollars.

I looked for an alternative and found that I could borrow from myself. So here are the reasons I took out a loan from my pension fund.

1. I had enough cash within the fund. I was allowed to borrow 50% or 50,000, whichever was less. I borrowed $50,000.
2. The interest rate was the lowest in town. I borrowed the money on February, 21, 2008 at 3.5%.
three. Simple application. I had to fill out a one-page form and fax it to the TSP office. I could have submitted it electronically and received a check in the mail. But, to get a direct deposit, a signature and a fax was needed.
4. Low fees. TSP charges a flat rate of fifty dollars for the loan.
5. Paying it back. This will be the beauty in my mind. It is an automatic payroll deduction, with no paperwork, and the money goes right back to my TSP (pension) using the 3.5%. I do not need to believe, and I will never be late with a payment.
6. Length of loan. TSP has two types of loans. 15 year and five year. The 15 year loan for investing inside your main residence. The 5 year loan is for individual use. I chose the five year simply because my property investment will probably be overseas in Thailand and will not be my main residence.

What’s the downside?

There are a couple of items to think about. The money I am utilizing is pre-tax and now I borrowed it. There might be tax implications.

I plan to pay the loan for two of the five years and then retiring. So, what happens to the money that I borrowed and have not paid back? It’ll now be declared as income unless I pay it back within about 60 days. If I can not pay it back, I will have to count this as taxable income, but, I do not care. I will be retired and my income will probably be low.

My cash isn’t within the marketplace. Accurate, 50K is now not going up or down. But, about $420 each and every two weeks, along with my regular investment, will be going back to my TSP. So, it will grow back.

Anyhow, that was what I did. It might not be the answer to your financial problem, but it is some thing to consider when you have a TSP and need some cash for college, a home, or to pay some bills.

Why Did I Borrow From My Pension Plan?