Key learning points
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A Thrift Savings Plan (TSP) loan allows uniformed service members or federal employees to borrow against their retirement plans, often with lower interest rates and easier qualifications than other borrowing options.
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You can borrow a minimum of € 1,000, but certain rules apply to the maximum amounts.
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You can borrow for general purposes or for residential use, with different rates and repayment terms.
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This method of borrowing involves certain risks and costs, such as certain fees, higher taxes and the loss of funds’ ability to accrue interest.
A Thrift Savings Plan (TSP) is a retirement plan offered to uniformed service members or employees of the federal government. A TSP loan allows members of a TSP retirement plan to borrow against their own retirement savings and is similar to a 401(k) loan.
A TSP loan can be a logical solution for eligible borrowers who need extra money to finance a large or unexpected expense. However, there are TSP loan rules and potential costs to consider before taking one out.
What is a TSP loan?
A TSP loan is a type of loan that allows federal employees or uniformed service members to borrow from their Thrift Savings Plan. Because you’re borrowing from your savings, it’s usually easy to qualify for a TSP loan. However, you may need to submit additional paperwork if you use your loan funds for residential purposes.
TSP loans allow you to borrow a minimum of $1,000, but the maximum you can borrow depends on a number of factors. For example, you can’t borrow more than 50 percent of your vested account balance or $10,000, whichever is greater, and you can’t withdraw more than $50,000 minus any TSP loans you took out in the past year.
Depending on how you use the loan, you have up to five or fifteen years to repay the money at a fixed interest rate, and payments can be automatically deducted from your paycheck.
There are two types of TSP loans:
- General purpose. These loans can be used for any purpose, require no documentation and have a repayment term of one to five years. There will be a $50 processing fee.
- Residential. This type is only used for the purchase or construction of a primary residence, requires documentation and has a repayment period of approximately five to fifteen years. They come with a $100 processing fee.
How do TSP loans work?
With a TSP loan, you essentially borrow your own money with a set period of time to pay it back. The TSP loan interest charged will be equal to the G Fund rate (Government Securities Investment Fund) the month before you applied for the loan.
Similar to a 401(k) loan, you pay interest charges on a TSP loan to yourself instead of to a bank or credit union because all the money repaid goes back into your retirement account.
How to Get a TSP Loan
You can apply for a TSP loan online by logging into “My Account” at www.tsp.gov. You may be able to complete the entire loan application process online. However, you may be required to submit supporting documentation. You can also use ThriftLine Service options, such as telephone, fax or mail.
If you participate in the Federal Employees Retirement System or are a uniformed service member and married, your spouse must sign the loan agreement to indicate their consent. Likewise, if you apply for a TSP loan as a participant in the Civil Service Retirement System, your spouse will be notified. In rare circumstances, there have been exceptions to TSP loan rules regarding spousal consent.
Conditions to qualify for a TSP loan
For both types of TSP loans, you must be a uniformed service member or federal employee. In addition, you must:
- Make sure you have at least $1,000 in co-payments in your TSP account.
- You have not repaid a TSP loan of any type in the last 30 business days.
- Be in “actively paying” status because TSP loan repayments are deducted from your paycheck.
- You have not had a taxable distribution on a loan in the past twelve months, unless it is related to your separation from federal service.
- You can only have one general purpose TSP loan and one residential TSP loan per account at any time.
- No court order has been placed against your TSP account.
Should You Get a TSP Loan?
Compared to other types of loans, TSP loans carry a fairly low risk: the interest rates are low and you borrow from yourself rather than from a lender. A TSP loan is a good solution if you need to borrow money for a purchase that you cannot pay for yourself.
However, it’s also important to consider the fees and rules associated with TSP loans before applying:
- Each loan has a processing fee, which is deducted from the loan amount.
- Most TSP loan borrowers will incur indirect costs in the form of sacrificed income because the money you borrow for your loan doesn’t have a chance to accrue interest. Even though you are paying yourself back interest, that amount is often less than what you would have earned if the money had stayed in your TSP account.
- When you pay yourself back interest, you do so with after-tax dollars. This means that when you start receiving payments from the account in retirement, you will have to pay taxes on the same money again.
You also want to make sure you can repay the monthly TSP loan payments. Use the Thrift Savings Plan Loan Payment Calculator to see how much you can pay monthly.
Disadvantages of a TSP loan
While borrowing from your own savings is a low-risk way to secure money, it’s not always ideal.
For example, unlike other lending options, such as a traditional personal loan, TSP loans will not help you build or improve your credit because payments are not reported to the credit bureaus. Additionally, TSP loan funds may be taxed twice as income: once before the loan and again after withdrawal in retirement.
You may also be at significant risk if you leave your federal job with an outstanding loan. In this situation, you have the option of continuing to pay the loan monthly, paying it off within the specified period, or having the loan disbursed within 90 days and taking the remaining debt as taxable income.
Frequently Asked Questions
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The minimum you can borrow for a TSP loan is $1,000. The maximum is the smallest of:
- The amount currently in your TSP minus any outstanding loans.
- Half of your vested account balance or $10,000.
- $50,000, minus outstanding loan balances from the past 12 months.
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A TSP loan, like a 401(k) loan, won’t show up on your credit report because it’s your own money you’re “borrowing,” so the only person you owe it to is yourself.
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If you complete your TSP loan application online and are approved, you will typically receive the funds within three business days. Paper applications submitted by mail may take several weeks to process.
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If a TSP loan isn’t the right path for you, consider alternatives, such as postponing an upcoming project or large expenses to build your personal savings fund. If you need cash urgently, a personal loan, a mortgage loan or a credit card with a 0% APR can be an alternative for unexpected expenses. If you choose this path, make sure you can afford to keep up with the monthly payments.
it comes down to
You can borrow a TSP loan from your own TSP retirement account if you are a uniformed service member or federal employee. TSP loans can be useful for consolidating debt or financing major expenses such as medical bills or home purchases.
While there are important things to consider when applying for a TSP loan, the low interest rates and easy qualification of the loan make it a solid alternative to personal loans or home equity loans.