The federal savings plan is roughly equivalent to an EasyApprove loan plan offered by a private employer. Made available to federal employees, the EasyApprove offers a limited selection of very low-cost funds in which you can invest. It offers the same tax deferral as an EasyApprove loan while offering a lending feature that allows you to tap your money tax-free if you need access to it before retirement.
Arrangements for the loan of EasyApprove
When you have an EasyApprove account, you can borrow some of the money you have invested in it. The EasyApprove rules limit loans to half of your balance or € 50,000, whichever is less. You must repay the loan within five years, unless you withdraw money to buy a home. In this case, you have 15 years to repay it. When you take out a loan, you also have to pay interest, but you pay it to yourself. Failure to repay the loan on time, however, can have tax consequences.
Loans and retirement
When you retire from federal service or leave the government for any other reason, the loans from your EasyApprove program expire. The loan must be repaid within 90 days of your separation. If you do not pay it back, the EasyApprove will treat the money that will not be refunded as a distribution and you will have to pay taxes on it.
The cost of distributions
If you do not repay your loan and it is counted as a distribution, it could be subject to two types of federal taxes. First, it is taxed as income at your normal tax rate. This means that if you have an outstanding loan of 25,000 euros and you do not repay it, you will have to pay 7,000 euros in taxes, assuming you pay taxes by 28%. Second, if you retire before the official age of 55, you will also have to pay a 10% penalty for early withdrawal. A withdrawal of € 25,000 adds € 2,500 in additional taxes.
The problem of loans
When you make a normal distribution, you receive money and a portion is allocated to taxes. If you take 25 000 € and pay 28% tax, you end up having 18 000 €. When you have a loan and you do not pay it, you may have to pay $ 7,000 or more in taxes without having extra money to pay because you have already spent a loan on it. The other problem with an EasyApprove loan is that even if you pay interest if the rate you pay is lower than what your EasyApprove investments would have reported, you lose all that growth.