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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?
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.
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.
A loan and withdrawal aren't considered the same thing. A loan as along as it is repaid doesn't have a penalty
Sounds like a great idea to me. Lower interest rate, and he's paying himself the interest, instead of paying the bank. Honestly, if he could pay himself a higher interest rate, it would be even better.
I definitely agree with getting out of the market. We are SO due for a major correction.
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.
There is no tax or penalty as long as he pays back the loan to his retirement account within 5 years. The payments are made via payroll deductions.
Sounds like a great idea to me. Lower interest rate, and he's paying himself the interest, instead of paying the bank. Honestly, if he could pay himself a higher interest rate, it would be even better.
I definitely agree with getting out of the market. We are SO due for a major correction.
You can only borrow 50% of your account balance or $50k, whichever is less. So he still will have skin in the game, but it seems like a good hedge against a market correction.
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?
But he plans to borrow from himself... care to elaborate?
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