Why Did I Borrow From My Pension Plan
Below is a MRR and PLR article in category Finance -> subcategory Loans.
Why Did I Borrow From My Pension Plan?
Introduction
Conventional wisdom advises against borrowing from your 401(k) or other pension plans. So, why did I decide to tap into mine? Let me explain.
Understanding My Plan
My pension is not a 401(k); it's a Thrift Savings Plan (TSP), a retirement plan managed by the U.S. government and one of the largest in the world.
Exploring Borrowing Options
I was interested in investing in property and considered various financing options. Initially, I looked into a home equity line of credit, as I have substantial equity in my condo and good credit. Although I was easily approved, the fees were in the thousands, despite the reasonable interest rate.
Why I Borrowed from My TSP
I discovered I could borrow from my TSP, and here are the reasons I chose this route:
1. Eligibility: I had enough funds to borrow up to $50,000, which I did.
2. Competitive Interest Rate: The interest rate was an attractive 3.5% at the time I borrowed in February 2008.
3. Simple Application Process: The process was straightforward. I submitted a one-page form to the TSP office via fax, and electronic submission was also an option.
4. Low Fees: TSP charges a flat fee of just $50 for the loan.
5. Easy Repayment: Repayment is seamless with automatic payroll deductions, meaning I never miss a payment. The money, plus the interest, goes back to my TSP.
6. Loan Duration: TSP offers two loan terms: a 15-year loan for primary residence investments and a 5-year loan for personal use. I opted for the 5-year term as my investment was overseas in Thailand.
Considerations and Downsides
There are a few things to keep in mind:
- Pre-Tax Money: Since I'm borrowing pre-tax money, there could be tax implications.
- Retirement Plans: I plan to retire after paying the loan for two years. Unpaid amounts at retirement become taxable income unless repaid within 60 days. However, with a lower retirement income, I'm not too concerned.
- Market Impact: The $50,000 isn't in the market, so it doesn't fluctuate. But with my bi-weekly contributions of $420, alongside regular investments, my TSP will continue to grow.
Conclusion
Borrowing from my pension plan was the right decision for me. It may not suit everyone's financial situation, but if you have a TSP and need funds for college, a house, or other expenses, it's worth considering.
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