Should I take out a HELOC or a TSP loan to finance my $40,000 bathroom renovation?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is the bathroom currently functional? I would save money over the next few years and then pay cash.

At this point, the useful life of the bathroom is over. It is > 50 years old and has never been updated. I would like to do this project now and not wait to save the cash.

If the toilet , shower and sink work, and there are no leaks, it hasn't outlived "its useful life." What a ridiculous way to characterize your desire for a renovation.

You described taking the TSP loan out as a "no brainer." I agree, in the sense that anyone who takes out a TSP loan out for an unneeded home renovation 5 years before retirement doesn't have the sense the good Lord gave a turnip.

OP here: some of us don't enjoy living in a dump. I'd like to live in a spruced up house now. I can afford it, and could pay cash if I wanted. But I don't want to - I'd rather have my cash invested and liquid if a good opportunity comes along. So thanks for the lecture, but do you have any insight into whether I should take out a TSP loan or a HELOC?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is the bathroom currently functional? I would save money over the next few years and then pay cash.

At this point, the useful life of the bathroom is over. It is > 50 years old and has never been updated. I would like to do this project now and not wait to save the cash.

If the toilet , shower and sink work, and there are no leaks, it hasn't outlived "its useful life." What a ridiculous way to characterize your desire for a renovation.

You described taking the TSP loan out as a "no brainer." I agree, in the sense that anyone who takes out a TSP loan out for an unneeded home renovation 5 years before retirement doesn't have the sense the good Lord gave a turnip.

OP here: some of us don't enjoy living in a dump. I'd like to live in a spruced up house now. I can afford it, and could pay cash if I wanted. But I don't want to - I'd rather have my cash invested and liquid if a good opportunity comes along. So thanks for the lecture, but do you have any insight into whether I should take out a TSP loan or a HELOC?

I'm curious what "good opportunity" you are waiting for. I truly don't understand why you would take out a TSP loan or HELOC if you already have the funds. If you're absolutely determined to do it anyway I would say the TSP loan is better.

[Anonymous]

Anonymous wrote:Two options for financing my bathroom renovation, which will cost $40,000.

Background: I am in my late 50's about five years away from retirement, and a long-time Fed. My current TSP balance is $1.2 million.

Option #1 - A TSP loan, where I take out $40,000, and pay it back over five years. The interest rates on that loan is 4.5%, but I pay that interest to myself over the course of the loan. So essentially, I forego whatever that $50,000 will earn in my TSP account for a 4.5% return.

Option #2 - A HELOC with a 9% interest rate. I could pay that back on a ten-year schedule, to reduce my payments a bit, but still....9% interest.

This seems like a no-brainer to me to take out the TSP loan, right?

Yes. TSP loan, for sure!

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is the bathroom currently functional? I would save money over the next few years and then pay cash.

At this point, the useful life of the bathroom is over. It is > 50 years old and has never been updated. I would like to do this project now and not wait to save the cash.

If the toilet , shower and sink work, and there are no leaks, it hasn't outlived "its useful life." What a ridiculous way to characterize your desire for a renovation.

You described taking the TSP loan out as a "no brainer." I agree, in the sense that anyone who takes out a TSP loan out for an unneeded home renovation 5 years before retirement doesn't have the sense the good Lord gave a turnip.

OP here: some of us don't enjoy living in a dump. I'd like to live in a spruced up house now. I can afford it, and could pay cash if I wanted. But I don't want to - I'd rather have my cash invested and liquid if a good opportunity comes along. So thanks for the lecture, but do you have any insight into whether I should take out a TSP loan or a HELOC?

I'm curious what "good opportunity" you are waiting for. I truly don't understand why you would take out a TSP loan or HELOC if you already have the funds. If you're absolutely determined to do it anyway I would say the TSP loan is better.

PP, you either have an unlimited amount of liquid funds, or no financial savvy. For those of us who have a good amount but not unlimited - say, $250,000 in liquit funds - there are ample reasons not to liquidate those funds instead of taking out a loan. Maybe they don't want to pay capitol gains taxes by cashing out a mutual fund. If PP can get a TSP loan at 4.5%, they would be better off doing that and leaving their cash in an S&P index fund. Maybe they want to use that cash to buy a vacation home, or another luxury. Maybe interest rates will go even higher, in which case the returns on cash get even better. Plenty of reasons not to pay cash.

[Anonymous]

It's not a 4.5% return. The cost of the TSP loan is the forgone growth. That should be compared to the HELOC interest.

The 4.5% is just money being moved from your income to the TSP, for no net gain.

https://www.kitces.com/blog/401k-loan-interest-to-yourself-opportunity-cost-tax-rules/

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is the bathroom currently functional? I would save money over the next few years and then pay cash.

At this point, the useful life of the bathroom is over. It is > 50 years old and has never been updated. I would like to do this project now and not wait to save the cash.

If the toilet , shower and sink work, and there are no leaks, it hasn't outlived "its useful life." What a ridiculous way to characterize your desire for a renovation.

You described taking the TSP loan out as a "no brainer." I agree, in the sense that anyone who takes out a TSP loan out for an unneeded home renovation 5 years before retirement doesn't have the sense the good Lord gave a turnip.

OP here: some of us don't enjoy living in a dump. I'd like to live in a spruced up house now. I can afford it, and could pay cash if I wanted. But I don't want to - I'd rather have my cash invested and liquid if a good opportunity comes along. So thanks for the lecture, but do you have any insight into whether I should take out a TSP loan or a HELOC?

I'm curious what "good opportunity" you are waiting for. I truly don't understand why you would take out a TSP loan or HELOC if you already have the funds. If you're absolutely determined to do it anyway I would say the TSP loan is better.

PP, you either have an unlimited amount of liquid funds, or no financial savvy. For those of us who have a good amount but not unlimited - say, $250,000 in liquit funds - there are ample reasons not to liquidate those funds instead of taking out a loan. Maybe they don't want to pay capitol gains taxes by cashing out a mutual fund. If PP can get a TSP loan at 4.5%, they would be better off doing that and leaving their cash in an S&P index fund. Maybe they want to use that cash to buy a vacation home, or another luxury. Maybe interest rates will go even higher, in which case the returns on cash get even better. Plenty of reasons not to pay cash.

DP, but I don't get this because aren't they taking the TSP money out of an index fund (if that's where it's invested)? Why is that better than taking it out of an after tax brokerage S&P fund? Other than maybe the tax timing? But either way, they're giving up growth in an index fund to spend $40k. Or else they're changing their asset allocation if they have the TSP in bonds.

[Anonymous]

Are you maxing out your retirement accounts?

If you take out a TSP loan, that’s another way to get more money in to the account. The interest doesn’t count towards contribution limits.

My 401k is charging 7.5% on loans. I current have a loan out so I can put in an extra $3800 a year. I’m one year in and will pay this one off next month and do it again.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Two options for financing my bathroom renovation, which will cost $40,000.

Background: I am in my late 50's about five years away from retirement, and a long-time Fed. My current TSP balance is $1.2 million.

Option #1 - A TSP loan, where I take out $40,000, and pay it back over five years. The interest rates on that loan is 4.5%, but I pay that interest to myself over the course of the loan. So essentially, I forego whatever that $50,000 will earn in my TSP account for a 4.5% return.

Option #2 - A HELOC with a 9% interest rate. I could pay that back on a ten-year schedule, to reduce my payments a bit, but still....9% interest.

This seems like a no-brainer to me to take out the TSP loan, right?

Why does a bathroom reno need to cost $40K? Is it cathedral sized?

Just spent $85k on a decent side bathroom
It’s not even huge and not even that high end.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is the bathroom currently functional? I would save money over the next few years and then pay cash.

At this point, the useful life of the bathroom is over. It is > 50 years old and has never been updated. I would like to do this project now and not wait to save the cash.

Does the toilet flush? That seems useful.

PP, we are getting a new bathroom. You are not going to talk us out of it. The question is how we finance the expense.

Ignore the rude pps. Do it now so you can enjoy it.

[Anonymous]

Anonymous wrote:Are you maxing out your retirement accounts?

If you take out a TSP loan, that’s another way to get more money in to the account. The interest doesn’t count towards contribution limits.

My 401k is charging 7.5% on loans. I current have a loan out so I can put in an extra $3800 a year. I’m one year in and will pay this one off next month and do it again.

This doesn't sound like a good idea per the article above:

One additional caveat of using a 401(k) loan to pay yourself interest is that even though it’s “interest” and is being “contributed” into the 401(k) plan, it isn’t deductible as interest, nor is it deductible as a contribution. Even though once inside the plan, it will be taxed again when it is ultimately distributed in the future.

Of course, the reality is that any money that gets invested will ultimately be taxed when it grows. But in the case of 401(k) loan interest paid to yourself, not only will the future growth of those loan payments be taxed, but the loan payments themselves will be taxed in the future as well… even though those dollar amounts would have been principal if simply held outside the 401(k) plan and invested.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is the bathroom currently functional? I would save money over the next few years and then pay cash.

At this point, the useful life of the bathroom is over. It is > 50 years old and has never been updated. I would like to do this project now and not wait to save the cash.

Does the toilet flush? That seems useful.

PP, we are getting a new bathroom. You are not going to talk us out of it. The question is how we finance the expense.

Do the TSP.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Two options for financing my bathroom renovation, which will cost $40,000.

Background: I am in my late 50's about five years away from retirement, and a long-time Fed. My current TSP balance is $1.2 million.

Option #1 - A TSP loan, where I take out $40,000, and pay it back over five years. The interest rates on that loan is 4.5%, but I pay that interest to myself over the course of the loan. So essentially, I forego whatever that $50,000 will earn in my TSP account for a 4.5% return.

Option #2 - A HELOC with a 9% interest rate. I could pay that back on a ten-year schedule, to reduce my payments a bit, but still....9% interest.

This seems like a no-brainer to me to take out the TSP loan, right?

Why does a bathroom reno need to cost $40K? Is it cathedral sized?

Because the OP is not living in bumblef*ck.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is the bathroom currently functional? I would save money over the next few years and then pay cash.

At this point, the useful life of the bathroom is over. It is > 50 years old and has never been updated. I would like to do this project now and not wait to save the cash.

If the toilet , shower and sink work, and there are no leaks, it hasn't outlived "its useful life." What a ridiculous way to characterize your desire for a renovation.

You described taking the TSP loan out as a "no brainer." I agree, in the sense that anyone who takes out a TSP loan out for an unneeded home renovation 5 years before retirement doesn't have the sense the good Lord gave a turnip.

You seem needlessly triggered. The OP has a healthy TSP and will have a pension in retirement, in addition to SS.

[Anonymous]

And this OP is exactly why I don’t get annoyed by all the “I have 10M in retirement assets and earn 1M a year” posts.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Are you maxing out your retirement accounts?

If you take out a TSP loan, that’s another way to get more money in to the account. The interest doesn’t count towards contribution limits.

My 401k is charging 7.5% on loans. I current have a loan out so I can put in an extra $3800 a year. I’m one year in and will pay this one off next month and do it again.

This doesn't sound like a good idea per the article above:

One additional caveat of using a 401(k) loan to pay yourself interest is that even though it’s “interest” and is being “contributed” into the 401(k) plan, it isn’t deductible as interest, nor is it deductible as a contribution. Even though once inside the plan, it will be taxed again when it is ultimately distributed in the future.

Of course, the reality is that any money that gets invested will ultimately be taxed when it grows. But in the case of 401(k) loan interest paid to yourself, not only will the future growth of those loan payments be taxed, but the loan payments themselves will be taxed in the future as well… even though those dollar amounts would have been principal if simply held outside the 401(k) plan and invested.

OP, pay attention to this post.

I have taken out 401k loans multiple times, including for a bathroom renovation. There are certainly some benefits.

The biggest drawback is that you are double taxed on the interest you pay yourself, as it is paid in after tax dollars and then taxed again as income when withdrawn. This is not the case with principal, though.

The best option is a Roth 401k loan.

You really have to run the numbers. For me, the origination fee was only $75, and I paid back the loan in 12 months (it bridged the time between 2 annual bonuses).