Repay Loan Faster or Contribute More Retirement?

[jeb6294]

With the move to DOE came a bump in pay, but now I'm trying to figure out what to with some of it.  If this were a standard $$$ issue I know the easy answer would be to get the loan paid off first, but this isn't standard because it was a TSP loan.  For those who don't know, the Thrift Savings Plan is the Gov't version of a 401k.  When you take out a loan the interest rate is set by what the TSP's G-fund is so it's pretty low and when you pay back the loan, the interest you're paying goes back into your TSP account so you're basically paying interest to yourself.

So, since the interest I'm paying goes back into my TSP account anyway, is there any advantage to paying off the loan faster over increasing my pre-tax TSP contributions?

**NOTE** Whichever I do, it will not have any affect on the hookers and blow fund.

 

[Road Guy]

So is this the equivalent of taking a loan out of your 401K in the private world?

Seems us older folks, making more money, putting the max into your pre taxed income is usually the smart bet (unless you are trying to pay off a loan with a way above average interest rate)

for me If it was 2-3% interest, then  I would let the loan be there and defer my taxable income.

 

[mudpuppy]

If you're going to put the money into the TSP either way (either paying off the loan or putting in contributions) I don't really see a big advantage of either method.  Over the long run the money will end up in your TSP either way.  One other thing to consider is a 401k loan you have to pay back immediately if you lose/quit your job.  Not sure if a TSP loan is the same, but if it is I'd pay the loan back first just in case.

 

[MA_PE]

About the only think I can think of is if you wanted to apply for a loan and they look at your expenses to see if you qualify.  That TSP loan could be a liability and hurt the chances of getting the loan.   Other than that I don’t see any difference in how you pay it back.

 

[jeb6294]

The more I think about it, I’m starting to wonder if I’d actually be better off increasing my TSP contribution. Contributions are taken out pre-tax that would be $$$ I’m not paying taxes on. Even if I pay more towards the loan, I’d still be paying taxes on it before I send the payment.

 

[Flyer_PE]

The more I think about it, I’m starting to wonder if I’d actually be better off increasing my TSP contribution. Contributions are taken out pre-tax that would be $$$ I’m not paying taxes on. Even if I pay more towards the loan, I’d still be paying taxes on it before I send the payment.

I think that's even a wash if you can deduct the contribution from your taxes when you file.

 

[Tiger15]

yeah, seems like a wash. I mean the "best" answer is do both. But you know, real life is real.

Assuming I understand the situation (it sounds just like taking a loan from your 401k) then this is how I see it.

• Either way the money is going into your retirement account
  
• While the loan is outstanding, the money of the load is growing at 2-3% since you're paying that interest to yourself
  
• The money that you put into the account (from either source) is probably growing at something like 6-15% depending on your elections and fund performance
  
• Additional contributions are tax deductible (assuming it's not Roth), so there's a slight tax advantage to increasing contributions and paying the loan off slowly
  
• But you can probably only have one loan at a time. (do you anticipate needing to do this again?)
  
• And you probably have to pay it back in full if you leave your job (do you anticipate changing jobs?)
  

So if you anticipate needing to take another loan OR if you anticipate changing jobs during the life of the loan, then I would pay off the loan faster. If you're not concerned about either of those possibilities, then maybe there's a slight advantage to paying the loan off slower and increasing your contribution. But like I said, it's almost a wash.

 

[jeb6294]

The way a TSP loan works, the payment is taken out of your paycheck after taxes.  Payments are made until it's paid in full.  One downside is making extra payments is way more annoying than it should be.  You have to print out a paper coupon and then mail in a paper check...like a caveman.  If you could do online payments like almost everyone else, I'd be more apt to do it.

You can only have one TSP loan at a time so no new loan until the first loan is paid off, but I don't see any need for another loan.

The only way you can avoid paying off the loan in full is by leaving the Gov't.  In that case, you either have to pay it back in full or stop paying all together, but if you don't pay then you have to pay the taxes and early withdraw penalty like you would with any private sector retirement.  I don't see leaving the Gov't anytime soon.

 

[Tiger15]

Sounds just like a 401k loan. Cool

 

[jeb6294]

Well, I just wouldn't be me if I didn't go overboard.  I had an Excel sheet to keep track of monthly expenses and stuff so I updated the crap out of it based on my new salary.  Long story short, I'm going to do a little of both, i.e. bump up my contributions a bit and add a bit to my loan payment.

When I crunched the numbers, if I took the money from bumping my TSP contribution and put it towards the loan instead, it'd knock off a couple years but 'only' save me about $100.  That money going into my TSP over a couple years is a lot more than $100.  The TSP site is really good and it'll let you reamortize your loan online so I'm rounding up my loan payment up a few bucks and bumping my contribution a bit.  That'll still knock a little more than a year off.

 

[Road Guy]

I mean come on man it’s 2020 - people still spam

message boards?

 

[jeb6294]

Yeah, seems like there have been more posts resurrected from the dead lately. It’s been way too long since I registered, does the host site have one of those “I’m not a robot” things for new accounts?

 

[Road Guy]

it does, these folks are even waiting a month + before they post anything.. too many people doing zoom school!

 

[tj_PE]

LOL I JUST SAW THE EDIT 

 

[Orchid PE]

I don't think TN was very happy with me when I put Lemon on my registration under the "Other Parties" section.

 

[lakersgirl]

Hey guys. I just joined. I think paying out the loan might be better and easier in the long run but that is just my opinion

 

[Road Guy]

Edited post coming later?

 

[leggo PE]

Edited post coming later?

Seriously my thought, too...

 

[lakersgirl]

now that is just plain rude I have to say. why would you guys say that?

 

[leggo PE]

now that is just plain rude I have to say. why would you guys say that?

It's a rib at recent spammers we've had to block from the site. As long as you don't come back and edit any of your posts with questionable links to irrelevant spam-looking sites, you should be in the clear!