TSP Loans - Current Pros and Cons

[Joseph O'Sullivan]

Hi All,

As I look at my options to finance my first RE deal, I was researching the early withdrawal penalty from TSP (Federal equivalent to 401K) and just learned that I can take out a TSP loan with no penalty, no tax impact and just have to pay it off with interest (seems to be 4-5% range right now) within 60 months.

I understand that there will be impact to the compounding of the TSP funds that I pull out for the loan, but I am speculating if I can buy the right real estate deal, it may offset that impact and get me on the path to accumulating more real estate via BRRRR that will more than compensate in the long term.

This would be a general loan from my TSP to fund the down payment for the bigger loan to buy the property .

Has anybody had either good or bad experience with this?

Pros and Cons or this approach?

Thanks for any feedback

Sincerely,

Joe

[Josh St Laurent]

Good question Joe, the nice thing about a TSP loan is that you are borrowing your own money, paying it back to yourself (with interest), and with no taxes or penalties so long as you pay it back. Usually, these are tied to your paycheck too which makes the payback simple as long as you are working at that company during the entire payback period. The max Uncle Sam allows is 50k if you haven't taken a TSP loan in the last year.

I've seen both good and bad experiences with this but at the end of the day it's no different from any other type of loan, you are just your own bank in a sense.

The downside or risk is that you lose your job, your property isn't cash flowing, are unable to pay back the loan, and your retirement account suffers since the loan essentially turns into a withdrawal.

The upside or best case is you have the loan for less than a year, your BRRRR pays off the loan, and you pay yourself interest 5% interest.

The opportunity cost is if the stock market goes up 20% and you were only paying yourself 5% interest you'll miss out on the excess returns.  Then again, if the market is down 20% you actually benefit from sheltering the 50k from the downturn, earning 5%, and using it to invest in RE.

Hope this helps