Thrift Savings Plan loans explained | Pros and cons + Alternatives
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Thrift Savings Plan loans explained

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Here’s how TSPs work for federal government employees looking for a loan.

Finding the right lender and qualifying for a good rate on a loan aren’t the easiest if you’ve slipped up on payments in the past and don’t have the greatest credit. Often it’s only the best of the best who get the lowest interest and highest amount when taking out a loan. But if you work for the federal government or are a member of the uniformed services, you’re eligible to draw from your Thrift Savings Plan (TSP).

It may impact your future retirement funds, but if you’re struggling to make ends meet, a small loan from your TSP could be the solution. Our guide will give you the information you need to make the most informed decision.

How do Thrift Savings Plan loans work?

Your Thrift Savings Plan is part of your retirement plan. It’s the federal government’s equivalent to a 401(k) offered by companies. Unlike Social Security or your FERS Annuity, the amount put away in your TSP is under your control. Your agency can match up to 5% of what you contribute, and the funds you put in are yours — whether you choose to use them now or later.

You can get a loan that draws from your TSP account while you’re employed with the federal government or are a member of the uniformed services. Much like borrowing from your 401(k), taking out a loan from your Thrift Savings Plan may change the total amount you have for your retirement. Even though the interest you pay returns to your account, it’s unlikely to match the money that would have accrued had you not borrowed.

However, unlike many other forms of credit, a loan drawn from your TSP has less stringent terms and costs less, giving you a place to borrow when you may not have any other options.

TSP loan details

You can borrow two types of loans from your Thrift Savings Plan. The general purpose loan can be used for anything, but the residential loan has some strict rules that may impact your decision to borrow.

You may only have one of each type at a time. However, if you have both a civilian and uniformed services account, you can borrow a loan from each of these, provided you have enough funds invested in the accounts. See loan eligibility below for more details.

General purpose loan

  • Minimum amount: $1,000
  • Maximum amount: Varies
  • Loan term: 1–5 years
  • Interest rate: TSP G Fund rate*
  • Loan fee: $50 administrative fee
  • Documentation required? No

Residential loan

  • Minimum amount: $1,000
  • Maximum amount: Varies
  • Loan term: 1–15 years
  • Interest rate: TSP G Fund rate*
  • Loan fee: $50 administrative fee
  • Documentation required? Yes

*As of May 2018, the TSP G Fund interest rate is 2.875%.

The TSP G Fund rate is determined when your application is processed and is fixed for the life of your loan. This means it won’t increase or decrease, and all the interest you pay has the added benefit of returning to your TSP account.

How is the maximum amount calculated?

There are three ways the maximum amount for your general purpose or residential loan is determined.

  1. Your total contributions made to your TSP account.
  2. The greater of half of your total account balance or $10,000.
  3. $50,000 minus paid or unpaid loan balances within the past 12 months.

Your account page on the TSP website lists the maximum loan amount you are able to borrow.

Am I eligible for a TSP loan?

General purpose and residential loans have the same eligibility criteria, but while you can use your general purpose loan funds for anything, a residential loan has its own specified uses.

General purpose loan

  • You must be employed by the federal government or be a member of the uniformed services.
  • You must be in pay status.
  • You must not have failed to pay a loan within the past 12 months.
  • You must have contributed at least $1,000 to your account.
  • You must not have repaid a previous loan within 60 days.

Residential loan

To qualify for a residential loan, you must meet the eligibility criteria outlined for the general loan. However, these loans may only be used for the construction or purchase of a primary residence. This can include anything from a house to an RV, but it may not be used to refinance an existing mortgage, fund any renovations to an existing residence or for the purchase of land.

What professions are considered uniformed service?

Uniformed service includes members of all five branches of the military, members of the National Guard and Ready Reserve, members of the Public Health Service and members of the National Oceanic and Atmospheric Administration who are currently active duty.

Should I take out a Thrift Savings Plan loan?

Before you borrow against your TSP, take the time to compare the benefits and drawbacks of this loan.

Pros

  • Interest returns to your account. The interest you pay on your general purpose or residential loan will return to your TSP account.
  • No lender hassles. Since you’re borrowing through your TSP account, you won’t have to worry about lenders. Your main point of contact will be the agency you work for.
  • Payment calculator. Not sure how much you’ll be paying? The TSP website has a calculator so you can see how much you’ll pay each month.

Cons

  • Less earnings on your contributions. Once your loan funds are taken out of your TSP account, that money won’t accrue interest until you pay back the loan. This may impact the future of your retirement savings.
  • Only one loan every 60 days. Whether you borrowed a general purpose or residential loan, you’ll have to wait 60 days after completing the final payment to take on another loan.
  • Must invest $1,000 of your own money. You must have contributed at least $1,000 of your own money to your TSP account before borrowing either loan type.

How do I apply for a TSP loan?

You can apply for a loan online or through a paper request on Form TSP-20. Your marital status, type of loan and method of disbursement will impact your loan request. If it does, you may not be able to complete the online application.

The paper form is one-page and relatively simple to complete, though if you are confused by any step, there is an attached instructions sheet. Here’s what you’ll need to fill it out:

  • Personal information. Your full name, the type of account you’re drawing from, your account number, date of birth and phone number.
  • Loan information. How much you want to borrow, your pay schedule and your preferred loan term.
  • Spouse’s information. Your spouse’s name, address and Social Security number.

Once completed, sign and date the application. You’ll need to submit or mail the completed application to the TSP. The TSP will review your application and, if you’re approved, will send you a loan agreement. Sign and return the loan agreement if the terms suit you, and you’ll receive your loan funds within seven to 10 days after your final approval.

What are my repayment options?

The easiest part of having a loan drawn from your Thrift Savings Plan is that you won’t have to worry about payments. Each payment is deducted directly from your salary each pay period and is reported on your quarterly earnings statement.

It’s your responsibility to make sure the correct amount is being deducted. If it isn’t, contact your agency or service to correct the issue.

Tax implications to consider

When you withdraw money from your TSP account, you may face tax penalties. This is because there are two types of funds in your account: traditional and Roth. A traditional balance includes contributions you and your employer have made that were not taxed. A Roth balance includes your contributions, which have already been taxed, and the earnings you’ve made on that money, which will be taxed as income and subject to an early withdrawal penalty if you’re younger than 60 years old.

Since many people likely have a mixture of traditional and Roth balances, this means the taxes can be complicated. The amount you borrow is taken proportionately from each pool, and if some of that income is subject to federal income tax, a percentage will be withheld to cover it. Nothing is withheld for state or local income tax, so you’ll have to cover this yourself.

Because the process is complex, it’s best to consult the Tax Treatment for TSP Payments Chart provided by the federal government and contact a financial advisor who specializes in the repercussions of withdrawing from your TSP account early.

What are some alternatives to a TSP loan?

A loan from your Thrift Savings Plan draws directly from the contributions you’ve made yourself. Therefore, you’re taking out a loan on your own money. If this doesn’t appeal to you, consider some of your other options below.

  • Build up your savings. Rather than take from your retirement fund, consider spending a few months focusing on your savings. This protects your future finances and avoids interest paid on other credit options.
  • Take out a personal loan. Even if you have bad credit, you may still be eligible for a personal loan that doesn’t impact your TSP.
  • Consider a home equity loan. Are you taking out a general purpose loan to cover renovation expenses? Home equity loans can cover most anything, and since they’re secured, you aren’t likely to pay a high interest rate.
  • Use a credit card. If you need less than $1,000, you could put the expenses on a credit card.

Personal loans to consider as an alternative

Rates last updated May 25th, 2018

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Bottom line

Although it may impact your future retirement goals, a Thrift Savings Plan loan can get you the funds you need without impacting your current finances. Be sure to compare your personal loan options before you make your final decision.

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Kellye Guinan

Kellye Guinan is a writer and editor with finder.com and has years of experience in academic writing and research. Between her passion for books and her love of language, she works on creating stories and volunteering her time on worthy causes. She lives in the woods and likes to find new bug friends in between reading just a little too much nonfiction.

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