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If your friend loses his job within 5 years and the money isn't paid back, do they have to pay the remaining balance in full? I believe that is a fairly common practice and thus why it's risky.
Yes. If they lost their job they would have to write a check to pay back the remainder of balance or face taxes and a 10% penalty on the outstanding balance.
But he does work for the federal govt which is a pretty secure job to have.
What you are stating is what may happen or happened to which isn't applicable to all. Your initial statement in which I quoted you was incorrect entirely. If you add something else on then the statement is changed. I have 1 year from separation to repay any outstanding loan before mine would become an issue
Again your situation doesn't apply to everyone. Back to your original statement taking out the loan doesn't result in a taxable situation.
Your quote was out of context and therefore falsely assuming a meaning that was not there. The discussion that I was responding to was a discussion about the impact of having the loan become a draw and therefore taxable if you default (or I added if you change jobs). That is absolutely correct. If the loan becomes and early draw you pay a penalty. You need to learn to read things in context, it you take a portion of an ongoing discussion out of context, you will never correctly understand the meaning. Although your statements are ambiguous, if you are trying to argue otherwise, then you are wrong. Sorry.
Your quote was out of context and therefore falsely assuming a meaning that was not there. The discussion that I was responding to was a discussion about the impact of having the loan become a draw and therefore taxable if you default (or I added if you change jobs). That is absolutely correct. If the loan becomes and early draw you pay a penalty. You need to learn to read things in context, it you take a portion of an ongoing discussion out of context, you will never correctly understand the meaning. Although your statements are ambiguous, if you are trying to argue otherwise, then you are wrong. Sorry.
Actually you quoted the entire post and responded not in context but to the entire thing. If you intended to respond directly to the portion which talked about not being able to pay the loan back you should have either included said commentary or quoted more accurately. Your incorrect blanket statements are not a problem I created nor is your inability to quote properly or identify what specifically what you are responding to instead of an entire opening post. Your statement was incorrect period, if you wanted context you should have given it
Just an update. The loan servicer processed his loan payment and he now has zero student loan debt so he’s saving the 5.5%. His TSP loan repayments will be taken directly out of his paycheck starting next pay period. So far the market is down from the day his loan from his TSP was withdrawn. But we are only a few days in. It will be interesting to see how this goes.
If your friend loses his job within 5 years and the money isn't paid back, do they have to pay the remaining balance in full? I believe that is a fairly common practice and thus why it's risky.
Interestingly, the current House tax plan removes this requirement. Under the plan, one would have until the tax due date to repay the loan which could range around 3 to 15 months. For example, If employment terminated on Jan 1, 2018, he would have until April 15, 2019 to repay the loan.
A buddy of mine has $45k left in student loans at about 5.5% with 7 years of payments left. He is thinking of borrowing $40k from his TSP which is a lot like a 401k but for Federal employees. He will have to pay it back to his own TSP over five years, while paying interest to his own account at the current G Fund rate which is 2.25%. The last $5k will be paid with savings.
I know one of the drawbacks of borrowing from a 401k is that if you leave your job before you pay it all back, the money borrowed becomes taxable. But it is unlikely a fed will leave the federal government.
I guess the main risk is missing out on the market continuing to go up at record rates, but we are due for a downturn.
It sounds like a good idea to me. What do you guys think? Any experience with borrowing from retirement accounts?
I wouldn't pull from my 401k to pay a student loan. federal loans have special benefits. for example, if you become disabled the loans are forgiven. Essentially he just wants to move the loan at the cost of his future. Paying them off with cash is one thing. Taking a loan from your retirement to pay a loan with that benefit is a bad decision. Just pay the loan faster it get it out of the move. Not to mention there are tax penalties for taking the money out of a retirement account.
Interestingly, the current House tax plan removes this requirement. Under the plan, one would have until the tax due date to repay the loan which could range around 3 to 15 months. For example, If employment terminated on Jan 1, 2018, he would have until April 15, 2019 to repay the loan.
That’s interesting. I did not know that. I guess that would help, if it passes.
I wouldn't pull from my 401k to pay a student loan. federal loans have special benefits. for example, if you become disabled the loans are forgiven. Essentially he just wants to move the loan at the cost of his future. Paying them off with cash is one thing. Taking a loan from your retirement to pay a loan with that benefit is a bad decision. Just pay the loan faster it get it out of the move. Not to mention there are tax penalties for taking the money out of a retirement account.
They were private loans. His federal loans were at 6.8% so he paid them off first a few years ago.
And you only get taxed on the loan if you don’t repay it within 5 years or in his case, leave the federal government. If that happens you can avoid the tax and penalty by sending in a check for the amount due to your TSP account.
Is there an additional tax penalty for early withdrawal? There is if you withdraw early from a 401(k).
He'll also lose ant gains as you noted and the effect of compounding. I think it's a bad idea. Who knows when the downturn will occur. If he wants to pay his loans off early, it would be better for him to take a second job and/or cut expenses. Federal jobs have been known to disappear if funding is cut. Borrowing against your retirement is almost never a good idea.
I just spoke with him and he went ahead with his plan. The money was transferred from his TSP to his checking account two days ago. He has already setup the student loan payoff which is being processed now.
I’ll keep you guys posted on how this goes for him.
That's a shame. 90% chance it was the wrong choice.
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