If you took money out of your TSP for a downpayment on a house....

[Anonymous]

Anonymous wrote:Let's say you took 50k out for a down payment at 30.

50k compounded at 7% until age 65 is $533,829. That's the real cost of a 401k loan.

I think the max length under my plan is 15 years.

Doesn’t matter where the 50k is from. Even if I took it from a savings account, I’d be losing that compounding interest over the life of the mortgage.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Let's say you took 50k out for a down payment at 30.

50k compounded at 7% until age 65 is $533,829. That's the real cost of a 401k loan.

But that 50k is paid off in just a few years. It’s not taken out permanently.

Most people are repaying their 401k loan in lieu of current year contributions, so it's still likely a net -50k gap in the account.

why do you assume they are no longer contributing? I'm confused.

Because if they had all this money to contribute their normal yearly amount AND pay off a huge 401k loan, they would have had the means to save for a real down payment in the first place. But they didn't...

I guess. However, my retirement contribution comes out of my paycheck before I see it--- and I never consider it as part of my budget. So I guess I assume I would not touch contributions even if I took a loan from my account.

+1. Same.

I contribute over $51k each year towards retirement including employer match and pension contribution. I took a 401k loan for purchasing my home.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Don't you people understand continously compounded interest and what you lost? I think borrowing from a TSP is incredibly stupid

This concept is lost on them. Sure, would be a great idea if you could time the withdrawal to coincide when the real estate market is at bottom and stocks are on the decline. Over the last 10 years you would gain way more money on retirement investments than real estate investments.

However I dont think the kind of person that entertains a retirement loan is exactly financially literate.

Yeah, this is wrong. All money not in the market has an opportunity cost, including non-retirement money used for a down payment. The cost of (say) a $250K down payment is indeed the lost returns on that $250K. But this does not depend on whether the money came from a retirement account, a non-retirement account, or even cash.

Because 401k loans allow you to move money in and out of retirement accounts with zero transaction costs, they are no different as a source of funding than non-retirement money.

This. It’s too complicated to even figure out.

Another factor is that I’d have to rent had I not purchased a home and over the life of the 401k loan, my rent would continue to increase.

I choose to take the 401k loan instead of selling company stock and paying capital gains. What’s the opportunity cost of the loan now that it’s allowed me to retain company stock into retirement that has continued to appreciate?

A 401k loan can be a very useful tool depending on the circumstances.

[Anonymous]

Anonymous wrote:Let's say you took 50k out for a down payment at 30.

50k compounded at 7% until age 65 is $533,829. That's the real cost of a 401k loan.

I think this is a simplistic way of looking at it. If you take out a TSP loan, you have to begin to repay it immediately and with interest. So, you aren't losing $533,829 because that 50k isn't out of the market permanently. It isn't even out of the market in totality for whatever the repayment period is because you begin to pay it back immediately. Sure, you do lose some of the compounding interest benefits. You'd have to weigh this with the money you'd pay in monthly mortgage, PMI etc and see if that is worth it to you or not. And, as some mentioned, they simply withdrew the money that was already in the G fund, which definitely doesn't earn 7% compounded interest.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Let's say you took 50k out for a down payment at 30.

50k compounded at 7% until age 65 is $533,829. That's the real cost of a 401k loan.

I think this is a simplistic way of looking at it. If you take out a TSP loan, you have to begin to repay it immediately and with interest. So, you aren't losing $533,829 because that 50k isn't out of the market permanently. It isn't even out of the market in totality for whatever the repayment period is because you begin to pay it back immediately. Sure, you do lose some of the compounding interest benefits. You'd have to weigh this with the money you'd pay in monthly mortgage, PMI etc and see if that is worth it to you or not. And, as some mentioned, they simply withdrew the money that was already in the G fund, which definitely doesn't earn 7% compounded interest.

Technically the 50k for a downpayment is always coming from somewhere. It could be a brokerage account, retirement account, checking account etc. You are always losing out on future compound interest but putting that 50k towards a home.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Let's say you took 50k out for a down payment at 30.

50k compounded at 7% until age 65 is $533,829. That's the real cost of a 401k loan.

But that 50k is paid off in just a few years. It’s not taken out permanently.

Most people are repaying their 401k loan in lieu of current year contributions, so it's still likely a net -50k gap in the account.

why do you assume they are no longer contributing? I'm confused.

Because if they had all this money to contribute their normal yearly amount AND pay off a huge 401k loan, they would have had the means to save for a real down payment in the first place. But they didn't...

I guess. However, my retirement contribution comes out of my paycheck before I see it--- and I never consider it as part of my budget. So I guess I assume I would not touch contributions even if I took a loan from my account.

+1, we have never lowered our TSP contributions, that is an assumption with no basis in fact. Where do you get your "most people" assumption from?

[Anonymous]

But you are paying the loan back with post tax money so you are effectively paying more. Repaying pre tax money with post tax money.

[Anonymous]

Anonymous wrote:But you are paying the loan back with post tax money so you are effectively paying more. Repaying pre tax money with post tax money.

This is simply false. Suppose I loaned myself $50K today, put the money in my chekcing account, and then used the same $50K to repay the loan in full tomorrow (no extra taxes). Now suppose I loan myself $50K, put it in a savings account, and use a different $50K, derived from labor market earnings, to repay the loan. But this is identical to the previous scenario, and no extra taxes have been incurred. Extending the timeframe (e.g., repaying the loan after 5 years instead of the next day) does not change anything.

[Anonymous]

Anonymous wrote:No regrets. Like PP, I re-adjusted my contributions so my repayment is like my G fund.

I know this is an old thread....but what do you mean by this?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Don't you people understand continously compounded interest and what you lost? I think borrowing from a TSP is incredibly stupid

This concept is lost on them. Sure, would be a great idea if you could time the withdrawal to coincide when the real estate market is at bottom and stocks are on the decline. Over the last 10 years you would gain way more money on retirement investments than real estate investments.

However I dont think the kind of person that entertains a retirement loan is exactly financially literate.

Yeah, this is wrong. All money not in the market has an opportunity cost, including non-retirement money used for a down payment. The cost of (say) a $250K down payment is indeed the lost returns on that $250K. But this does not depend on whether the money came from a retirement account, a non-retirement account, or even cash.

Because 401k loans allow you to move money in and out of retirement accounts with zero transaction costs, they are no different as a source of funding than non-retirement money.

This. It’s too complicated to even figure out.

Another factor is that I’d have to rent had I not purchased a home and over the life of the 401k loan, my rent would continue to increase.

I choose to take the 401k loan instead of selling company stock and paying capital gains. What’s the opportunity cost of the loan now that it’s allowed me to retain company stock into retirement that has continued to appreciate?

A 401k loan can be a very useful tool depending on the circumstances.

The correct answer is to not do any of those things in order to buy a home. You keep your money in the 401k. You don't sell company stock in order to finance a home purchase. And the fact is if your rent increases you could always move to a cheaper rental.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Let's say you took 50k out for a down payment at 30.

50k compounded at 7% until age 65 is $533,829. That's the real cost of a 401k loan.

But that 50k is paid off in just a few years. It’s not taken out permanently.

Most people are repaying their 401k loan in lieu of current year contributions, so it's still likely a net -50k gap in the account.

why do you assume they are no longer contributing? I'm confused.

Because if they had all this money to contribute their normal yearly amount AND pay off a huge 401k loan, they would have had the means to save for a real down payment in the first place. But they didn't...

Poor assumption here. Most people continue to contribute to at least get the match. The TSP loan is in addition to those contributions. People opt for this route because its one of the better deals on the market for borrowing large lump sums. Personal loans are above 7-8% at even the best credit unions. Their net pay decreases as a result of loan until repaid.

[Anonymous]

People borrow money from their TSP? How bad off do you need to be to do that?

[Anonymous]

Anonymous wrote:People borrow money from their TSP? How bad off do you need to be to do that?

Not bad off at all. I started making $62K out of law school in public service while my buddies who went private sector made $140K plus. They’re now making $200K+ and I’m a GS-14 at 120K. I went to law school wanting to work in public service and care deeply about the work that I do. My DH is in non-profit for a major disease that kills children far too young. He could’ve went big four accounting, but he loves the mission. So, we make a decent salary combined but nowhere near enough to save up 20% on a down payment in this area (and we live in the exurbs). All our bills are paid, our toddler is clean, clothed, and fed regularly. We drive paid off Honda’s. A TSP loan allowed us to get into a house and pay less in mortgage than we do rent and made sense for us. Took 3 years to pay it back.

[Anonymous]

Anonymous wrote:Don't you people understand continously compounded interest and what you lost? I think borrowing from a TSP is incredibly stupid

Which could be offset by avoiding PMI (which in Maryland is hard to get rid of before the end of 5 years with l without a refi).

[Anonymous]

While we are talking opportunity cost to not having money in the tsp, keep in mind too that knowing I can take a loan to myself from my tsp for a home down payment allows me to put whatever I can spare in my tsp. Rather than parking my down payment on Bigger House, which I have not decided yet even to buy, in savings I can dump the money into my tsp where it will hopefully grow. When and if I decide to buy the house I can loan myself the down payment or part of it and pay myself back. If I never buy, all that money I don't spend will have been in my tsp since the beginning.

I would never stop my tsp baselin tsp contribution to pay on a tsp loan. It would be additional payments to my mind, the same as a personal loan from a bank or a larger mortgage payment with pmi.