TSP Loan: What You Need to Know
A government employee as well as a member of the armed forces may be eligible to take out a loan against their Thrift Savings Plan (TSP) account.
While a Thrift Savings Plan (TSP) account is intended to help prepare for retirement, a TSP loan could be used for other purposes, such as paying for unexpected costs or even a down payment on a house. Members of the uniformed services (including members of the military and more) and federal government employees may be eligible.
Borrowing from your TSP is similar to borrowing from any other lender; you’ll need to pay it back by the agreed-upon date.
Due to the convenience of having the funds automatically deducted from your paycheck, a TSP loan may be appealing. Another perk of TSP loans is that repayments, both principal and interest, are deposited directly into your retirement fund.
However, there are potential drawbacks to taking out a TSP loan that you should be aware of. There are a number of other factors to think about when deciding whether or not to take out a TSP loan, and we’ll go through them with you.
What Is a TSP Loan?
A TSP loan is a loan that can be taken out against a participant’s Thrift Savings Plan account by a government employee or member of the armed forces. A TSP loan is simple to get approved for because you’re using your own savings to pay back the loan, however, you may need to provide more documentation if you want to use the money to buy a home.
With enough money in your TSP, you can take out a loan of up to $50,000. Repayment terms are fixed at either five or fifteen years, depending on the purpose of the loan, and payments can be taken directly out of your paycheck.
TSP loans can be divided into two categories:
- General purpose – One to five-year repayment terms are available on these loans, and the funds can be utilized for anything.
- Residential – This form of loan can only be used for the acquisition or building of a principal residence, and it has a repayment duration of one to fifteen years.
How Does a TSP Loan Work?
A TSP loan is a type of withdrawal from your own retirement savings account that must be repaid to your TSP within a certain time frame. This is analogous to a 401(k) loan. Both 401(k) loans and TSP loans are paid back with pre-tax dollars deducted from your paycheck and applied to the principal and interest.
If you take out a TSP loan, the rate you’ll pay will be determined by the rate at which the G Fund, a money market retirement fund available to federal employees, is earning interest at the time. On the day your loan was originated, you agreed to pay interest at the same rate as the G Fund.
In addition to the interest accrued on the loan, borrowers must pay a $50 processing fee whenever they withdraw funds from their TSP.
Loan amounts start at $1000. The limit is determined by a number of variables, including the size of the borrower’s TSP account and the presence or absence of any existing TSP loans. The ceiling may go as much as $50,000 in exceptional circumstances. Although both mortgages and personal loans are available, typically only one of each type of loan can be outstanding on a given account at any given time.
If you leave federal employment while still owing money on your TSP loan, you must repay the balance within 90 days after the day your agency or service files your separation.
If that happens, you have a few different repayment choices at your disposal.
- Completely paying back the loan
- Repaying a portion of the principal and receiving a payout of the remaining balance that is taxed
- Taking a payout that is equal to your whole loan debt and being subject to taxation
- Unpaid loan balances are subject to income taxation at the federal level. Furthermore, if you’re under 55, you may owe the IRS a 10% early withdrawal penalty.
How to Get a TSP Loan
By accessing “My Account” on the TSP website (www.tsp.gov), you can submit a loan request. It’s possible to apply for a loan and finish it entirely online. The loan application may require physical submission, though. If you are asked to print the application, do so only after you have double-checked the information and included any supporting materials requested. You have the option of uploading the documents to your TSP account or mailing or faxing it in.
Several criteria determine if printing the form is necessary. Consider your personal situation, such as your marital status, the type of TSP loan you’ve requested, and the method you’ve selected for receiving the loan proceeds.
If you are a member of the Federal Employees Retirement System or in the uniformed services and you are married, your spouse must sign the Loan Agreement to show their agreement. If you are a member of the Civil Service Retirement System and want to borrow money from your TSP, your spouse will be informed as well. Spousal approval hasn’t always been required for TSP loans, but there have been exceptional cases where this wasn’t the case.
TSP Loans: Benefits and Risks
Benefits
- No need to conduct a credit check – Because credit scores aren’t used to make lending decisions, this is a great choice for folks who have been turned down for loans elsewhere due to their low scores.
- Reduced interest rates – The interest rates for TSP loans are one of the lowest of any loan option.
- Self-lending – As you are repaying interest to yourself rather than a lender, you get to retain the entire amount.
- Simple and convenient payments – Your loan payments will be deducted straight from your paycheck.
- Benefits associated with employment status that are not monetarily compensated – Inform your TSP administrator if you are placed in a non-pay status (such as furlough or leave without pay), and you will not be required to make contributions until you return to work.
Risks
- Not a good way to establish credit – While a TSP loan doesn’t necessitate a credit check, it also won’t help you establish credit because your payments won’t be submitted to the credit bureaus.
- Possible large unexpected cost to you – It doesn’t matter how you got out of the federal service, if you don’t pay off your loan before you depart, you’ll still have to pay the whole thing back. The alternative is to pay hefty fines and additional taxes.
- Opportunity cost missed – The rate of interest you pay yourself is probably lower than the rate you could get if you invested the money elsewhere. This means the rate at which your money grows will be lower.
Is a TSP Loan a Good Idea?
In order to qualify for a TSP loan, you must have at least $1,000 in TSP contributions, need the funds to pay for a primary residence or other needs, and believe that you will be able to afford the loan’s monthly payments for the foreseeable future.
However, there are drawbacks to withdrawing money from a TSP account. Repaying the loan could reduce your retirement savings if you can’t afford to keep making your regular contributions. You will lose out on the higher earnings potential of your investments if you take out a loan, regardless matter how low your interest rate may be.
Your interest charges are not deductible for tax purposes either. You lose the ability to deduct mortgage interest payments if you take a loan out of your 401(k) instead of getting a regular mortgage.
If you’re worried about how taking out a TSP loan would affect your retirement funds, there are probably better options out there.
When Does a TSP Loan Make Sense?
When money is tight, the last thing you should do is go into your retirement fund. But if you find yourself in a bind and in need of a loan, you can choose from several various types of credit, including credit cards, personal loans, and even a home equity loan or line of credit.
However, interest rates on credit cards are sky-high, getting approved for a personal loan with a lower rate is a long shot, and a home equity loan or line of credit is out of the question if you don’t own your own house.
When an unexpected expenditure arises or a job is lost, a TSP loan might be a practical option for those who qualify.
Final Thoughts
As a member of the military or perhaps a government employee, you are eligible to take out a TSP loan against your own TSP retirement savings. Consolidating debt or financing sizable purchases like a home or car might also benefit from TSP loans. With low rates of interest and simple eligibility requirements, TSP loans are a great substitute for personal loans and home equity lines of credit, despite the fact that there are still significant factors to consider before applying.
