Ask Money

Borrowing Against 403(b)

Chris Farrell Jul 15, 2008

Question: Most of my 403B money (Thrift Savings Plan) is in the government securities (G) fund. I have a mortgage on a commercial real estate investment property that has a 3 year variable interest rate currently 4% above the rate I can borrow from the TSP. Should I borrow against the TSP, moving the limit of $50,000 to a general loan against the TSP, saving on interest by applying the amount to the mortgage? No prepayment penalty, the property has a positive cash flow, and I can make both payments (TSP loan & the ongoing mortgage payment) Mark. Billings, MT

Answer: I wouldn’t do it. I think there is too much risk and not enough reward to this maneuver. You have a solid retirement savings plan. You have a commercial real estate investment property with a positive cash flow. I’d leave them be.

Borrowing against a retirement savings plan is more expensive than it appears. For one thing, you repay the loan with after-tax dollars. You’re also losing the benefit of compounding. If you do lose your job you have to repay the loan quickly or it’s treated as an early distribution. That means you’ll pay a 10% penalty (assuming your under 59 ½) plus ordinary income taxes on the money you’ve taken out. You’re also leveraging up your investments, putting a portion of your retirement money at risk to the property.

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