Do some research online about borrowing or taking out a loan from your 401(K) plan, and about 99 percent of the sites you visit will tell you never to borrow money from your pension.
So why did I take something from yours? I will tell you.
First of all, mine isn't a 401. (K). It's called a TSP, which stands for "Thrift Savings Plan." It is one of the biggest pension plans in the world and is run by the US government.
I wanted to put money into real estate, so I looked at what my options were. A home equity line of credit was the first choice I had. I've owned my condo for about 20 years, so it's worth something to me. My credit is good, so it was easy for the lender to say yes.
The fees and interest rate were the problems.
The interest rate was pretty good, but the fees were in the thousands of dollars.
I looked for another option and found that I could borrow from myself. So, here are the reasons why I borrowed money from my retirement account.
- The fund had enough money. I could borrow either 50% of the money or $50,000, whichever was less. I got a loan of $50,000.
- Simple application. I had to fill out and fax to the TSP office a one-page form. I could have sent it through the computer and gotten a check in the mail. But to get a direct deposit, you had to sign and send a fax.
- It had the lowest interest rate in town. On February 21, 2008, I borrowed the money at a rate of 3.5 percent.
- Fees are low. For this loan, TSP charges a flat rate of $50.
- Paying it back. In my mind, this is beauty. It is taken out of my paycheck automatically, so I don't have to do any paperwork, and the 3.5 percent goes right back into my TSP (pension). I don't have to think, and I'll never be late with a payment.
- The loan's length. The TSP offers two kinds of loans. 15-year and 5-year bonds. The 15-year loan for making improvements to your main home. The loan is for personal use and is for 5 years. I chose the 5-year loan because my property investment will be in Thailand, which is not where I will live full-time.
What's the bad part?
There are some things to think about. I borrowed the money I'm using, which was earned before taxes. There could be tax consequences.
I plan to pay off the loan for two of the five years and then retire. So, what happens to the money I borrowed but haven't paid back? If I don't pay it back in about 60 days, it will be counted as income. If I can't pay it back, I'll have to add this to my income for tax purposes, but I don't care. I will be old and have a small income.
I don't have any money in the market. It's true that 50K isn't going up or down anymore. But about $420 will go back into my TSP every two weeks, on top of what I already put in there. It will grow back, then.
In any case, I did that. It might not solve your money problem, but if you have a TSP and need money for college, a house, or to pay some bills, it is something to think about.
