facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
TSP Loan? Step Away from the Paperwork...Please Thumbnail

TSP Loan? Step Away from the Paperwork...Please

TSP Taxes Military Pay and Benefits

I think one of the great benefits military officers have is access to the Thrift Savings Plan (TSP). But one of the options you have with the TSP can hurt your financial situation more than you might think. That option is the ability to take a loan from your TSP.

It can seem to make a lot of sense. You're paying 12 - 20% interest on a credit card. You can get loan from TSP for say around 7%. Take the loan and pay off the credit cards and save 5 - 13% in interest payments. It can be a good idea. But, before you go down that road, make sure you understand all the nuances.

Don't Neglect Opportunity Costs

Opportunity costs are what you give up (opportunities) when you go down one path. The opportunity cost associated with a TSP loan is the returns that you could earn on your investments if you leave the funds invested in TSP. Those returns should not be neglected. For the 10 years ending in 2018, the TSP funds generated the following returns:

  • S Fund:  13.67%
  • C Fund:  13.17%
  • I Fund:      6.48%
  • F Fund:     3.73%
  • G Fund:    2.30%

So, if you're paying 12% on a credit card, you might want to look more closely at opportunity costs (granted, paying off the credit card is "risk free" and TSP returns are exposed to market risk).

Tax Ramifications

When you make contributions to the pre-tax side of TSP, your contributions are not subject to current taxation. That will change if you take out a loan. Let's say you earned and contributed $10,000 to TSP. You decide you need that $10,000 to pay off the credit cards. You pay off the credit cards and start paying off the loan. But you need to earn more than $10,000 to pay it off. Ignoring interest charges you'll need to earn somewhere around $13,500, depending on your tax bracket, to pay off the $10,000. Then when you take the money out, you'll pay taxes on the distribution of around $3,000 (again depending on tax brackets). So almost half of your earnings go to taxes.

If you've made contributions to Roth TSP, the tax ramifications aren't insignificant either. Let's take the same scenario. In this case, you earn $13,000 and contribute $10,000 to Roth TSP. After paying off your credit cards you'll need to earn $13,000 to pay off the $10,000 loan. At least you won't be taxed when you take the money out of Roth TSP. But, in essence you'll need to earn $16,000 to have $10,000 in Roth TSP (however, in this case you would have needed to earn $13,000 to pay of the $10,000 of credit card debt regardless).

Loan Acceleration

If you retire or separate from the military the loan accelerates and must be paid off within 90 days of your separation or the loan is considered a taxable distribution. And since you probably won't be 59 1/2 when you retire or separate from the military the distribution will be subject to a 10% penalty as well.

Military Benefits aren't Always Simple

Understanding your military and veterans' benefits takes time and effort. We do it every day. If you'd like some help with yours, give us a call.

If you found this article useful, you might like the following blog posts:

The Times (And TSP) They are a Changin'

What Military Officers Need to know about tSP and Estate Planning

Roth TSP in a Combat zone:  Almost a "no Brainer"

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.