The double taxation of interest is not a material cost & should be the criterion for whether to take a TSP loan. To me, the main criterion to decide whether to take a TSP loan is what you plan to do with the loan proceeds. If you plan to take a vacation or buy a boat with the 💰, then the answer is “NO.” But if you took the loan proceeds & invested them yourself - in exactly the same mutual fund or other mechanism you have in your TSP, you’d be generating the same return in both cases. BUT, in the case of the taxable investment account, you could sell your shares after 1 year & your proceeds would be taxed at the LTCG rate (15%). Whereas, if you did the same thing within your TSP, your proceeds would be taxed as income (22-24%). But the biggest point is in the taxable account, only your gains are taxed, whereas with a TSP, the entire distribution is taxed. So, for example, assuming return rate of 25% (for comparison: S&P return for 2024 will be ~28-30%) in 2025, $50000 in your TSP would generate $12,500 in gains. Taking that amount ($62,500) as a distribution at EOY would generate a tax bill of ~ $15K ($62.5K * .24), leaving you with $47.5K after tax. But taking a $50K TSP loan & investing it in the same S&P index fund, but in a taxable account, generates the same proceeds ($62,500), but your tax bill is only $1875 ($62.5K * 15%), leaving you with $60,625 after tax. That’s quite a difference. And with the TSP loan, you could pay the CG tax ($1875), then repay the entire loan to TSP ($50K minus the 10 monthly payments you’ve made over the loan period), and have (at least) $10,625 of pure, tax-free profit that you can then use to fund a self-directed ROTH IRA to generate tax-free returns forever. That seems to be a pretty low-risk, high-return investment strategy to me. Please feel free to check my math & my assumptions. I’d love someone to show me how this is wrong because I’m thinking of doing it myself & don’t wanna take a 🛁 if i’m wrong.
The double taxation of interest is not a material cost & should be the criterion for whether to take a TSP loan.
To me, the main criterion to decide whether to take a TSP loan is what you plan to do with the loan proceeds.
If you plan to take a vacation or buy a boat with the 💰, then the answer is “NO.”
But if you took the loan proceeds & invested them yourself - in exactly the same mutual fund or other mechanism you have in your TSP, you’d be generating the same return in both cases. BUT, in the case of the taxable investment account, you could sell your shares after 1 year & your proceeds would be taxed at the LTCG rate (15%). Whereas, if you did the same thing within your TSP, your proceeds would be taxed as income (22-24%).
But the biggest point is in the taxable account, only your gains are taxed, whereas with a TSP, the entire distribution is taxed.
So, for example, assuming return rate of 25% (for comparison: S&P return for 2024 will be ~28-30%) in 2025, $50000 in your TSP would generate $12,500 in gains. Taking that amount ($62,500) as a distribution at EOY would generate a tax bill of ~ $15K ($62.5K * .24), leaving you with $47.5K after tax.
But taking a $50K TSP loan & investing it in the same S&P index fund, but in a taxable account, generates the same proceeds ($62,500), but your tax bill is only $1875 ($62.5K * 15%), leaving you with $60,625 after tax.
That’s quite a difference. And with the TSP loan, you could pay the CG tax ($1875), then repay the entire loan to TSP ($50K minus the 10 monthly payments you’ve made over the loan period), and have (at least) $10,625 of pure, tax-free profit that you can then use to fund a self-directed ROTH IRA to generate tax-free returns forever.
That seems to be a pretty low-risk, high-return investment strategy to me.
Please feel free to check my math & my assumptions. I’d love someone to show me how this is wrong because I’m thinking of doing it myself & don’t wanna take a 🛁 if i’m wrong.