Do some online research about borrowing or taking out a loan from your 401(K) plan and you will see about 99% of the sites you visit will tell you to never borrow money from your pension.
So, why did I borrow from mine? I will tell you.
First, mine is not a 401(K). It is similar and called a TSP – Thrift Savings Plan. It is 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 home equity line of credit. I have a condo now for about 20 years so I have some equity in it. My credit is good, and it was an easy acceptance from the lender.
The problems were the fees and interest rate.
The interest rate was actually 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 money in 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%.
3. 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 required.
4. Low fees. TSP charges a flat rate of fifty dollars for the loan.
5. Paying it back. This is the beauty in my mind. It is an automatic payroll deduction, with no paperwork, and the money goes right back to my TSP (pension) with the 3.5%. I don’t have to think, and I will never be late with a payment.
6. Length of loan. TSP has two types of loans. 15 year and 5 year. The 15 year loan for investing in your primary residence. The 5 year loan is for personal use. I chose the 5 year because my property investment will be overseas in Thailand and will not be my primary residence.
What is the downside?
There are a few items to consider. The money I am using is pre-tax and now I borrowed it. There may 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 will 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 don’t care. I will be retired and my income will be low.
My money is not in the market. True, 50K is now not going up or down. But, about $420 every two weeks, along with my normal investment, will be going back to my TSP. So, it will grow back.
Anyhow, that was what I did. It may not be the solution to your financial issue, but it is something to consider if you have a TSP and need some cash for college, a house, or to pay some bills.