Do some online research about borrowing or borrowing from your 401 (K) plan, and you will find that almost 99% of the sites you visit will tell you to never take money from your pension. ۔
So, why did I borrow from myself? I will tell you
First, of all, I don't have a 401 (K). This is similar to what is called TSP-Thrift Savings Plan. It is run by the US government and is one of the largest pension schemes in the world.
I wanted to invest in some real estate and looked at my options. My first option was a home equity line of credit. I have had a condo for about 20 years now, so I have some equity in it. My credit is good, and it was an easy acceptance by the lender.
The issues were fees and interest rates.
The interest rate was actually decent, but the fees were in the thousands of dollars.
I looked for an alternative and found that I could borrow from myself. So these are the reasons I borrowed from my pension fund.
1. I had a lot of money in the fund. I was allowed to borrow 50% or 50,000, whichever was less. I borrowed $50,000.
2. The interest rate was the lowest in the city. I borrowed this amount on February 21, 2008, at 3.5%.
3. Simple application. I had to fill out a one-page form and fax it to the TSP office. I could collect it electronically and receive a check in the mail. But, to get a direct deposit, a signature and fax were required.
4. Low fee. TSP charges a flat rate of ڈالر 50 for a loan.
5. Pay it back. This is the beauty of my mind. This is an automatic salary deduction, without any paperwork, and the amount goes back to my TSP (Pension) with 3.5%. I don't have to think, and I will never delay payment.
6. Length of loan. There are two types of loans in TSP. 15 years and 5 years. 15-year loan for investment in your primary residence. 5-year loan is for personal use. I chose 5 years because my property will be invested abroad in Thailand, and it will not be my main residence.
What is the downside?
There are a few things to consider. The money I am using is pre-tax, and now I have borrowed it. Taxes can have implications.
I plan to repay the loan for two out of five years and then retire. So, what about the money I borrowed and didn't repay? It will now be declared income until I return it within about 60 days. If I can't repay it, I have to count it as taxable income, but, I don't care. I will retire, and my income will be less.
My money is not in the market. True, 50K is not going up or down anymore. But, about 20 420 every two weeks, with my normal investment, will return to my TSP. So, it will grow back.
Anyway, that's what I did. This may not be the solution to your financial problem, but it is important to consider whether you have TSP and need some cash to pay for college, housing, or some bills.
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