Before one borrows against their TSP, one must consider all the reasons for possibly prematurely dipping into the retirement fund. In the instance of this article, I’m going to focus on large credit card debt, and how you might be able to use a TSP loan to help alleviate some of that burden.
First, a word of advice: don’t even start down this road if you haven’t yet gotten to the root cause of your debt in the first place. Bad spending habits might be to blame, and unless your behaviors have changed, borrowing against your TSP won’t solve the problem, and you’ll eventually end up right back where you started.
If you suspect your credit card debt is caused by bad behavior, then things like the creation of a budget (and following through with it!) and having someone like a spouse hold you accountable to your savings and spending goals are good ways to help address that problem.
But barring that, things still happen, right? Moving to a new house or apartment, illness, and other unexpected expenses can pop up quickly, and if we don’t have the money stashed away, most of us will turn to the credit card to get us through.
But once the credit card debt has been racked up, then what do we do to try and get rid of it?
The worst part is the interest, where 15 to 18 percent is the pretty stand rate for most credit card companies. A smart move might be to refinance. A lot of cards will put off charging interest as a way of enticing you. Transferring the balance might be a viable option, depending on how much you owe. Some cards charge a 3 percent fee to move balances over, so if you have large amounts of debt, this might not be viable.
Transferring your balance to a credit union may be another option to look into, as they traditionally charge less interest than the credit card companies.
Peer to peer loans are yet another route to look into, and looking into a peer to peer lending site could provide a lower interest rate than your currently paying, depending on things like your credit score and other financial factors.
And finally, the TSP loan, as mentioned is a final option, though if you are borrowing against your own retirement savings, you should be sure you can replace the money in a timely fashion so and not to miss out on any accruing interest of that account.
Should you go this route, there are a few minor details that you should know when borrowing against your TSP. Firstly, you won’t be able to take more than half your balance out, maxing out at $50,000. Second, there will be no earnings on the money you removed as part of the loan. And paying back the loan is usually deducted directly from your paycheck. And you must pay interest after taxes.
This interest rate, when repaying you TSP, is usually pretty low though, molded after the way the G fund is structured, at about 2 percent interest per year.
Just remember, each person’s debt is different, and the solution for one individual might not be the perfect solution for you. Once you figure out why you’re overspending, you can take the steps mentioned here to alleviate your debt and get back in the black.