Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Welcome to Reyna Retirement. Reyna Reyes has dedicated her career to helping people make smarter financial decisions. Reina retirement is all about breaking down complex financial concepts into language you can actually understand.
Now here's the co founder of American Federal Benefits Consultants, Reina Reyes.
[00:00:40] Speaker B: Well, I think we all know the bit where the three stooges stand around and the one guy says, hey, I got this 10 bucks. And the guy says, hey, you owe me 20 bucks. He goes, well, here's 10, I owe you 10. The other guy says, hey, you owe Me 10 bucks or you owe me 20 bucks. Here's 10, I owe you 10. And they keep doing this, they pass it around. Here's 10, owe you 10. Here's 10, owe you ten. Okay, now we're good. And the guy ends up with the one guy that started with the same $10, ends up with the $10, but everybody's now done with owing themselves. That's how a loan works. How crazy is that? That's how money works. It just keeps getting sent around and around and around. And what do you have in TSP that you can borrow from yourself? It doesn't have to go anywhere. It goes from you, from one of your buckets to another one of your buckets and potentially back again. So, so how do the TSP loans work? You can take them, you can borrow money from yourself. What do I pay tax on with a loan? I don't. A loan is not a taxable event, right? So you have the opportunity. If you have enough money in your TSP and you've been contributing, you can say, hey, tsp, I need to take some money out of you to do whatever it is I'm going to do. You can take a general purpose loan, you can take a residential loan, you could even take a hardship loan. But if you can avoid that, it will be better just because it comes with some drama. But the general purpose loan is the most common because it's, you don't need a reason and you don't need to prove anything. You just grab the cash as long as you have the ability to do so. Now, used to be you could only have one. Turns out now you could have two general purpose loans at the same time and a residential if you wanted to. Now, residential you can take more money to borrow for, but you got to have a specific purpose. You got to have like construction, new, new home or whatever. You got to prove this home home scenario. But a general purpose loan, you just say, I need to grab cash, give it to me. And then they set you up on a repayment plan so you can say, hey, I want to pay it back really fast in like a year or two. Or you can say, no, no, I want to take as long as possible and the longest is five years. So you can get set up on a repayment plan which is also not taxable because it wasn't taxable money anyway to pay back this dollar amount. So what's the interest rate we can do right now? Well, today that interest rate is a measly 4%. So if you were going to say, oh, I'm going to go to bank of fill in the blank to get a loan for whatever reason, they're going to say to you, whatever their rates are, maybe it's 5, 6, 7, 8%, I don't know. But always double check TSB because this loan is a significantly less expensive interest rate in many, many cases.
And I was joking with somebody that, you know, I remember back in the day where I, I feel like a, like a, like an old lady on a rocker. Like I remember. So I can't get that whistle in there.
Sunny. There it is. Hey, Sunny. And Chris. No, I'm just kidding.
Back in the day when the interest rate was 0.86%, under 1% and there even before that was 0.6 anyway, and I was helping a gentleman who was trying to buy a Corvette and he says, yeah, I've got a, I've got a deal. I'm gonna talk my banker. And they got me on like a 7% interest rate for this whatever. I'm like, 7%. You're getting shafted. Go to your tsp and you can use the same loan or get a loan just as much and only pay point, whatever. And I was just corresponding with him four or five months ago. He's like, did you see the loan rates? Right Now I'm at 0.8 something. And people now are at four and a quarter or whatever. And we're saying it's like, it's so much now, but it's still so low now in comparison with other stuff. So if you're thinking you're going to take a loan from wherever, you might consider your own source first as a potential location for that loan. Now it does cost you. You got to pay 50 bucks. Oh my goodness. Crimea River. Crimea river crime.
So 50 bucks. Oh darn. And $100 for the residence loan because you can take more down is going to take it longer to get paid back. But again, this is not, I mean you pay, you pay fees in other loans anyway, right? So this is not to say, hey everybody, let's go take a loan from tsp. That's not what I'm saying. If you're going to take one anyway and you needed the cash, this is something to consider like it's a, it's a source if you're going to do the same thing. If I'm going to take a trip, should I take the subway or a car or walk or bike or take a plane? I'm going to still get to my location. Like the outcome is going to be the same. The method or the means is what matters, what the difference is, right? And sometimes it's more expensive or takes longer in the travel. Here we go. Saves us money to do the same thing. Now somebody's going to come on here and say, oh, but I'm going to not make money on that money for a time period. Yeah, that's correct. But again, that's all part of it. If you take a loan from somewhere else, right, Yet a higher percent interest rate, then depending on how long it takes you back, you still could be compounding that interest rate anyway, right? Depending on how they've got it structured. And if that's the biggest concern, do a mixture, right? Take some from here, some from the other. Get the best of both worlds.
So yes, there is what they can, what they consider opportunity costs, right? If I had 500,000 and I borrowed 30, now I'm only making interest on the 470 remaining, so I could lose the opportunity. But again, we're talking usually very small ratios of what your total TSP is. And you're putting money back in tax free. This is tax free money. It's not a taxable event to take it out.
Now what happens if I retire and I have a loan?
Well, here's the fun part. You could keep paying it off. Number one, you have choices. So, so you see here, you can keep it active by setting up monthly payments, money order, direct debit, things like that. And it's just an automatic do it. But you've got to still keep the same cadence that you were on. So if you had a three year loan and you got a year left, you still have that same year left. If you had a five year loan and you're on year one, you still are on that same monthly or same dollar amount cadence to pay it off over the next four years.
Now, you could pay the whole thing off. You could always do that. That's cool.
Or you could say, nah, I'm not paying this off. Tax me, and they'll send you a 1099 for whatever's left on your loan that you haven't paid back yet. So if I had a $30,000 loan and over the course of two years, I paid off 20 of the 30, I only owe 10. I retire and I don't talk to them at all after 90 days, they say, hey, you've defaulted. And people flip out. They're like, I defaulted on my loan on my credit. Has nothing to do with your credit. They say default. It just means you're not paying the loan back anymore.
And then come January, the next year, after that calendar year's over, you get the 1099 for the $10,000. Well, would I rather pay $10,000 or the tax on $10,000?
That's not even double jeopardy, Alex. That's a pretty, you know, I'd much rather pay the tax personally. The only other question in determining whether you want to pay it off or not is a tax question. Am I going to throw myself into another tax bracket? Does my tax guy approve? Does my spouse approve? I'm just kidding. But, you know, am I going to pay more in taxes by having this as income? Because it does count as income. Well, I mentioned $10,000 because that's not commonly throwing somebody into another tax bracket. And if it did, they're only paying that additional dollar amount on a very small portion. But if your outstanding balance is 30 grand or 50 grand or something big, you might consider a mixture of the first option and the last option, meaning, oh, I'm going to pay. I'm going to keep paying this off, paying it down, rather, until another year or two. So where I don't owe 30 grand anymore, maybe when I owe 15 or something like that, and I'll default when I have a low enough balance that I'm comfortable with paying tax on that amount in whatever year that is. Plus if I'm retired, ideally, well, not ideally, I'll be making less money. It's not ideal, but in general, you're grossing less money so you have more room to take a 1099 of extra money to stay in the same tax bracket.
The other thing you want to consider is my Medicare, my Medicare people, my beneficiaries, my people over 65 or who had Social Security disability for two years or more.
We want to watch out what money you take out because what does it count for?
Income counts as income. And you've got that IRMAA threshold, the income related monthly adjustment amount for making too much stinking money. And if you said, oh well, I made this and then I didn't pay the loan off and it threw me into another tax bracket. But even worse than that, it threw me into an IRMAA threshold, now I'm paying more for my Medicare. Some people now Instead of paying 202.90, they may be paying 280 or 300 and something, 400 and something. It just depends on how far over the threshold you went because it's banded. So these are some things to consider to look at all sides of the story and really make a plan. These are some easy things to consider. They're very easy thresholds. Right? You say, hey, am I this tall? Am I that tall? How high is my income and how I am like cool with it going. But first of all, should you take a loan? Depends on what you're trying to do. Who should take a loan? Anybody who needs it. Obviously, if you're going to take a loan at all, you might consider this first.
Do you need your spouse's permission? Yeah, they got to sign something and it's like an Adobe sign TSP uses now. And it's a pretty easy process. I mean there's people with loans all over town and it's not a bad process. It helps people, it gives you money and you pay the money back. No tax. If you need help, you want to model a loan, you want to kind of simulate what. This makes sense. Some people even prepping for retirement under age need cash. They take a loan and then they plan to pay it off over the next year after retirement and then tax it later. It's a whole different way to think of things. There's a lot of stuff outside the box you've been living in that me and my team might know. Reach out, get scheduled 850-450-6500 or you can text us or comment on this and we'll see if we can get to you. As soon as we can make a plan. Oh, there's our, there's our tagline. As soon as we can, we'll make a plan. You reach out, we'll talk to you soon. And happy TSP loan.
[00:10:35] Speaker A: Thanks for listening to Reyna. Retirement. With a strong commitment to ethical standards, Raina works hard to find the right solution for each individual or family who reaches out for advice. To contact Reina directly, call 850-4450 6500. That's 850450 6500. Or to reach the team at American Federal Benefits Consultants, call 1-800-872-8857. That's 1-800-872- 8857. You can also go online to americanfederal.org not affiliated with the United States Government. Opinions expressed are subject to change without notice. These opinions are not intended as investment advice, nor do they predict future performance of any product. All information provided is believed to be from reliable sources. However, we make no representation or warranty as to the accuracy of any statement. The information is intended to be educational in nature and does not provide a guarantee or specific result. All copyrights and trademarks are the property of their respective owners. American Federal Benefits Consultants is an independent organization, not a government agency or affiliated with the Federal Government or any state government. The terms CSRs, FERs, FELI, and FEHB are all registered trademarks of the U.S. office of Personnel Management. American Federal Benefits Consultants, agents, consultants, or any independent contractors do not provide tax, legal or investment advice and do not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
