TSP loan question

[Anonymous]

If you have a traditional TSP setup and take a loan, my understanding is that your amortized payments are setup with pretax dollars. However, if you send in extra payments, obviously that is after tax dollars, so when you withdraw TSP money in retirement, wouldn't you get taxed twice on any extra payments you made for a TSP loan? Does that mean there is greatly reduced incentive to pay off a TSP loan early? I know you can reamortize your loan to pay if off faster if you request to reduce the years it takes to payback, which I assume are still pretax dollars, but for lump extra payments it is after tax.

Is there anyway at getting around being taxed twice? Can you direct the extra payments into a Roth TSP? That way your taxed earnings go in but you don't get taxed on the way out. I know you can have both traditional and Roth at the same time.

[Anonymous]

I don’t think you are taxed twice. Remember, the dollars in the loan you took were put in pre-tax. You’re just replacing those dollars. It seems like a sweet deal if you put in pretax dollars, then use those dollars in a loan and repay the loan pre-tax again. You’re basically getting double the tax savings as people who don’t take a tsp loan.

[Anonymous]

Anonymous wrote:I don’t think you are taxed twice. Remember, the dollars in the loan you took were put in pre-tax. You’re just replacing those dollars. It seems like a sweet deal if you put in pretax dollars, then use those dollars in a loan and repay the loan pre-tax again. You’re basically getting double the tax savings as people who don’t take a tsp loan.[/quote


You are taxed twice for extra payments. Yes, the amortized loans are paid on schedule with pre-tax dollars, but you can send checks in in order to payoff a loan faster. Where else does the money come from a bank account then? Bank account money is taxed dollars. Then when you withdraw in retirement from a traditional TSP you are taxed again....meaning you are paying taxes twice for any extra monies you out in to payoff a loan. Is the only way then to re-amortize the loan so that all pretax dollars are used to pay the loan? Paying extra out of your checking account stupid? Can you do any tricks with a Roth TSP to avoid double taxes on extra repayments?

[Anonymous]

Based on the way I understand you to be approaching this, its basically a wash. You're forgetting the dollars you originally put into your TSP (tax free) and withdrew (tax free) for the loan.

Let me try a more concrete example. Year 1 you put $10K tax free into your TSP, leaving a taxable salary of $90K. Year 2 you take a $10K loan, you still don't pay taxes on those dollars. Year 3 you repay the loan in full. If you repaid the loan with pre-tax dollars you'd be reducing your taxable salary by $20K when in reality you have only saved $10K in your TSP.

[Anonymous]

Anonymous wrote:If you have a traditional TSP setup and take a loan, my understanding is that your amortized payments are setup with pretax dollars. However, if you send in extra payments, obviously that is after tax dollars, so when you withdraw TSP money in retirement, wouldn't you get taxed twice on any extra payments you made for a TSP loan? Does that mean there is greatly reduced incentive to pay off a TSP loan early? I know you can reamortize your loan to pay if off faster if you request to reduce the years it takes to payback, which I assume are still pretax dollars, but for lump extra payments it is after tax.

Is there anyway at getting around being taxed twice? Can you direct the extra payments into a Roth TSP? That way your taxed earnings go in but you don't get taxed on the way out. I know you can have both traditional and Roth at the same time.

Nope. All your payments are after taxed. Like PP said, your loan is not being taxed (you get the full amount). Your payments replace the money taken out. It will be taxed at the time of your retirement. Thus, it is taxed once not twice.

It doesn't matter where your payment money comes from. It could come from your after taxed income, your inheritance from a foreign country, or your cash-only (underhanded/not taxed) job. It just a replacement for the loan.

[Anonymous]

as i understand it, your withdrawals are done on a prorata basis. if your TSP is comprised of 75% TSP ROTH and 25% TSP TRADITIONAL and you want to take a loan for say, $10,000, your disbursement would be $7500 from the TSP ROTH and $2500 from the TSP TRADITIONAL (less the $50 admin fee).

if your loan payment is say $100 per pay period, that would be made $75 back to the TSP ROTH and $25 to the TSP TRADITIONAL but you would be paying with your after tax dollars.

[Anonymous]

The above posters are correct. Pay it back with after tax money. When you took the loan, didn't pay any tax on the loan proceeds. Now pay it back with after tax funds.

[Anonymous]

OP, as others have noted, you are incorrect about your premise. You repay your TSP loan with after-tax $.