The TSP Loan -- Waiting for the other shoe to drop...

[Wes S.]

Good morning BP. I've been considering using a Thrift Savings Plan (TSP) loan to help finance my next investment. As I've looked into it with some caution (after all, EVERYBODY* says "Max out TSP! Don't touch it!"), to me it looks VERY appealing. I'm looking for feedback on what I'm missing.

The pros of the TSP loan:

-There is no 10% IRS fee (unlike 401k)

-The fee to process the loan is $50

-The loan does not count as taxable income so long as it's repaid

-The current interest rate is 2.375%, which is paid back to my own account and not a bank

The cons:

-No TSP earnings from what I withdraw (but it will ideally be earning a much higher return from real estate, but it's worth stating that there is a risk if the investment isn't good)

-The loan interest does not appear to count as an expense for any investment, so it would not be tax-deductible

-Some "Ifs"; IF I leave federal service, I have to repay it all in 90 days. IF I don't pay on time, it triggers it as taxable income.

So I'm waiting for the catch. Because this sounds far better than a HELOC or the 401k options. What am I missing here?

[Carl Fischer]

@Wes S.

401K does not have a 10% fee for a loan either. Some companies do not charge any fee for a loan from your 401K.  No loan is taxable income unless you don't pay it back. 

The one draw back I see is that you pay it back with out a deduction thus paying taxes on the principal and interest you repay. Then when you distribute it to yourself in x years you will pay tax again. Consider buying your next investment in the TSP/401K/IRA/etc versus borrowing. You are right it probably isn't that big a deal although I am personally working on tax free income for life at this point.