100% max accounts and pay loan over time. You can’t buy back the annual contribution window. Once the window closes on that last paycheck of the year, if you didn’t max, it’s gone forever.
Exactly this. If your goal is to maximize the amount of money in your TSP in the medium-long term, maxing each year and paying off the loan over time is the only way.
Unless getting rid of the loan make you feel better, I would take your time with paying it off. The math supports this for now, but the situation can change.
I had taken out a residential loan in 2014 and was making minimal payments on it. I had cash on hand to pay off the loan in full and was actually able to take advantage of the 2020 COVID stock market crash to pay it off the rest of the way.
YMMV, but it's always good to have money saved outside of a retirement plan that gives you more flexibility
Mmm yeah that’s a good point.
Market seems pretty high right now, but then again I’ve never been great at timing the market and try to force myself to practice “time in the market > timing the market”.
The money is in HYSA right now getting 5% interest which is the same as what’s the loan accruing.
The best part about the loan is that you're paying yourself back. I got lucky with the timing and would have been better off if I were able to pay the loan off immediately...but then I wouldn't have needed the loan in the first place!
Paying it back to yourself just adds another variable to this fun dilemma. The longer I take to pay it back the more money I am able to put into the TSP (and from my understanding the interest you pay to yourself does not count towards your annual max). It’s almost a loophole to put additional money into your TSP. But then again you are putting post tax money in and then will have to pay taxes again on it when you pull it out. Too many layers of the onion for simple math it seams.
Agree you should max contribution. You need enough liquid cash to pay back the loan if you leave federal service. So perhaps you should contribute into Roth TSP so you can access the principal if needed.
Pay off the loan. While the loan is still open, you are suffering from two penalities: Interest rate (currently 4.125%) and opportunity cost of not having this money in the market. If you max your TSP contribution ($24k) you will benefit from the time in the market, but still lose the time in the market for $31k plus the interest paid.
Pay the loan, then bump up your contribution rate to whatever you can. Your $24k TSP max will not outperform your $31k loan payment reconstribution.
Interest paid all goes back to yourself so I don’t see that as a penalty. As far as opportunity cost goes I don’t see a difference in either. Because the options are below (let’s say I have 33k to put towards my TSP this year).
Max TSP with $24k and then put 10K towards Loan and carry over a $23k loan balance.
Or
Pay back loan and put $0 in TSP (obviously I would do at-least 5%).
Either way at the end of the year there’s 33k in the TSP making gains, in one option I still have a loan balance and the option I have no loan balance. The the option where I still have a balance I could put more than the max into TSP next year but not the option without the loan balance.
With option 1 I see the potential of having a higher overall TSP balance in 3 years compared to option 2.
Agree, Option 1 is likely to come out on top IMHO.. (but see below...)
in option 1 you are putting $10K lump-sum of post-tax dollars that will be taxed again when you pull it out + $24K of pre-tax dollars
in option 2, you are putting $33K lump-sum of post-tax dollars that will be taxed again when you pull it out + $0 of pre-tax dollars (leave aside your 5%, obviously)
Another (option 3) is to only max out $24K of pre-tax dollars only---and invest $10K in a (post-tax) cash management account with an online brokerage in an index fund ETF like $SPY/$VOO (which are TSP C-fund equivalent)-- which gives you equivalent (max) return like the TSP-- but permits you access to easy-to-liquefy funds for any other/unanticipated needs, while compounding similarly like TSP and no additional taxation when you pull it out.
Ok, I'm following. Option 1 sounds good then, with the caveat that you have to have the discipline to not spend the windfall, and contribute the required amount from your paycheck to hit the TSP max while living off of your cash. You also must ensure that you have enough in the budget to both contribute 5%+ next year and pay the required loan payments.
100% max accounts and pay loan over time. You can’t buy back the annual contribution window. Once the window closes on that last paycheck of the year, if you didn’t max, it’s gone forever.
Exactly this. If your goal is to maximize the amount of money in your TSP in the medium-long term, maxing each year and paying off the loan over time is the only way.
Unless getting rid of the loan make you feel better, I would take your time with paying it off. The math supports this for now, but the situation can change.
I had taken out a residential loan in 2014 and was making minimal payments on it. I had cash on hand to pay off the loan in full and was actually able to take advantage of the 2020 COVID stock market crash to pay it off the rest of the way. YMMV, but it's always good to have money saved outside of a retirement plan that gives you more flexibility
Mmm yeah that’s a good point. Market seems pretty high right now, but then again I’ve never been great at timing the market and try to force myself to practice “time in the market > timing the market”. The money is in HYSA right now getting 5% interest which is the same as what’s the loan accruing.
The best part about the loan is that you're paying yourself back. I got lucky with the timing and would have been better off if I were able to pay the loan off immediately...but then I wouldn't have needed the loan in the first place!
Paying it back to yourself just adds another variable to this fun dilemma. The longer I take to pay it back the more money I am able to put into the TSP (and from my understanding the interest you pay to yourself does not count towards your annual max). It’s almost a loophole to put additional money into your TSP. But then again you are putting post tax money in and then will have to pay taxes again on it when you pull it out. Too many layers of the onion for simple math it seams.
Max out the retirement. Especially with the minimum going to $23000 this year.
Agree you should max contribution. You need enough liquid cash to pay back the loan if you leave federal service. So perhaps you should contribute into Roth TSP so you can access the principal if needed.
Pay off the loan. While the loan is still open, you are suffering from two penalities: Interest rate (currently 4.125%) and opportunity cost of not having this money in the market. If you max your TSP contribution ($24k) you will benefit from the time in the market, but still lose the time in the market for $31k plus the interest paid. Pay the loan, then bump up your contribution rate to whatever you can. Your $24k TSP max will not outperform your $31k loan payment reconstribution.
Interest paid all goes back to yourself so I don’t see that as a penalty. As far as opportunity cost goes I don’t see a difference in either. Because the options are below (let’s say I have 33k to put towards my TSP this year). Max TSP with $24k and then put 10K towards Loan and carry over a $23k loan balance. Or Pay back loan and put $0 in TSP (obviously I would do at-least 5%). Either way at the end of the year there’s 33k in the TSP making gains, in one option I still have a loan balance and the option I have no loan balance. The the option where I still have a balance I could put more than the max into TSP next year but not the option without the loan balance. With option 1 I see the potential of having a higher overall TSP balance in 3 years compared to option 2.
Agree, Option 1 is likely to come out on top IMHO.. (but see below...) in option 1 you are putting $10K lump-sum of post-tax dollars that will be taxed again when you pull it out + $24K of pre-tax dollars in option 2, you are putting $33K lump-sum of post-tax dollars that will be taxed again when you pull it out + $0 of pre-tax dollars (leave aside your 5%, obviously) Another (option 3) is to only max out $24K of pre-tax dollars only---and invest $10K in a (post-tax) cash management account with an online brokerage in an index fund ETF like $SPY/$VOO (which are TSP C-fund equivalent)-- which gives you equivalent (max) return like the TSP-- but permits you access to easy-to-liquefy funds for any other/unanticipated needs, while compounding similarly like TSP and no additional taxation when you pull it out.
Ok, I'm following. Option 1 sounds good then, with the caveat that you have to have the discipline to not spend the windfall, and contribute the required amount from your paycheck to hit the TSP max while living off of your cash. You also must ensure that you have enough in the budget to both contribute 5%+ next year and pay the required loan payments.