TSP Loan: What Is It & How Does It Work?
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Summary:
A thrift savings plan (TSP) is a retirement plan for federal employees and uniformed service members. A TSP loan is money borrowed from your TSP fund that you pay back later with minimal interest. The loan can be used for general purposes or to buy a house.
TSP account holders have the benefit of taking out loans or withdrawals from their federal retirement funds, which they can pay back directly from their federal paycheck. However, it’s worth considering all the facts before deciding to take out a loan from your fund.
If you’re a TSP account holder and want to learn more about your options when it comes to taking out personal loans, this guide has the answers you need.
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What is a TSP plan?
A thrift savings plan is a retirement savings plan for uniformed federal service members and federal employees. It’s comparable to a 401(k), and like a 401(k), you can make withdrawals and borrow money from your own retirement savings to be paid back later with a low interest rate.
Like any loan, you must repay the loan amount within a certain time frame. Unlike with 401(k) loans, there are specific uses for the money you borrow from your TSP fund.
What is a TSP loan?
TSP loans can be used to pay for surprise expenses or large purchases, like buying a house. There are two kinds of loans: general-purpose loans and residential loans.
- General purpose TSP loan. This is a general-purpose loan that can be put toward any purpose, often surprise expenses such as hospital bills. No documentation is needed to take one out, the repayment term is from one to five years. There is also a $50 processing fee.
- Residential TSP loan. This loan is only for purchasing or building a primary residence and requires documentation that you or your spouse is buying or building the residence. The repayment term is one to fifteen years, sort of like a conforming loan. There is a $100 processing fee for this type of loan. You can put this loan toward buying a house, just like a mortgage loan, but the difference is that your home isn’t used as collateral. That means you don’t run the risk of losing your house if you default on a loan payment.
When you take a loan, the funds that you withdraw are no longer invested in your TSP account, which means that you will miss out on potential investment gains. — Faris Khatib of Ideal TaxClick to Tweet
How does it work?
You can think of a TSP loan like a 401(k) loan: You’re essentially borrowing money from your own savings and paying it back with a low interest rate. However, with TSP loans, you can have your loan payments taken directly from your paycheck each month (a payroll deduction). That way, the money you borrowed goes directly back into your account and you don’t risk missing a payment. You can also pay your loan back over time, sort of like an installment loan.
The interest rate for a TSP loan is based on something called a Government Securities Investment Fund, or “G fund” for short. It’s basically a separate savings fund that federal workers can invest money in. The interest rate of the G fund is what determines the interest rate on your TSP loan, which can vary from month to month.
Pro Tip
If you’re not sure how to best use your retirement savings, or you need some help starting your retirement account, make sure you talk to an investment advisor first.
How do you get a TSP loan?
To start, you must apply for a TSP loan online. Remember, the TSP account and TSP loans are reserved for federal employees and members of the uniformed services. If you do not work for the federal government, you won’t be able to get a new loan or apply for one.
You can complete the application online and upload the required documentation. Depending on the documentation required, you might have to submit documentation through mail or fax because of your marital status, what type of TSP loan you requested, or how you want to receive the loan funds.
IMPORTANT! If you have a federal employee savings fund and are married, your spouse needs to sign the loan agreement before you can get a TSP loan. The same is true for uniformed service members.
What do you need to get one?
For either type of TSP loan, you must be a uniformed service member or a federal employee. In addition, you must:
- Have contributed at least $1,000 of your own money in your vested account balance;
- Not have repaid the same type of TSP loan in your own account within the last 60 days;
- Be in “active pay” status in your federal job;
- Not have had a taxable loan distribution within the last year (with an exception for distributions related to separation from federal service);
- Only have one of each type of loan on your account at any time; and
- Not have a court order placed against your thrift savings account.
How long do they take to get?
Getting the money from a TSP loan takes less than 14 days, barring any complications. If you submit your application and supporting documentation quickly and are approved online, it could take as little as 8 days to get your funds. However, applying by mail could take several weeks.
Pro Tip
If you can get your application and supporting documentation submitted online, you’ll get your loan faster. Usually, account holders who submit their loan application online get their funds between 8 and 13 days later.
Is it better to take a TSP loan or withdrawal?
When deciding whether to take out a loan against your TSP retirement fund or a withdrawal, remember that withdrawals permanently reduce the amount of money in your fund. Unlike with loans, you don’t have to make payments on them (as with a loan).
In addition to that, withdrawals also may be subject to income taxes, which you could have to budget for. So, before applying for a TSP loan or withdrawal, weigh these factors carefully.
Should you take out a TSP loan?
TSP loans are low-risk, much like 401(k) loans. You’re borrowing money that you already have from yourself, so you just need to make sure you have the funds to make timely payments. That said, because interest rates for these loans are based on the G fund rate, TSP loan rates are fairly low, making TSP loans an even safer bet.
Before you try borrowing a new loan, make sure you have at least $1,000 of your own contributions in your account. Withdrawing from your thrift savings account prematurely can do more harm than good, namely by taking funds out of your retirement fund that you otherwise could have saved. Consider taking out other loans before dipping into your TSP.
Also important to consider is how a TSP loan can affect the total amount of money in your retirement fund, says Faris Khatib of Ideal Tax.
“[T]aking a loan from your TSP can also have a negative impact on your retirement savings,” he says. “When you take a loan, the funds that you withdraw are no longer invested in your TSP account, which means that you will miss out on potential investment gains. This can significantly impact the growth of your retirement savings over time, and may leave you with less money in retirement than you had hoped for.”
Additional considerations
The minimum amount you can borrow from your thrift savings account is $1,000. The maximum depends on a few things, such as how much is in your account or whether you have an outstanding loan balance already. However, you can take out one of each type of loan at the same time, just not more than one of each.
When you pay your loan amount back to yourself, you’re paying interest with after-tax dollars. So, when you start getting disbursements and payments from the account after retirement, you will have those taxes deducted from those same funds again. Since these funds can be taxed as income twice, make sure you really need to take the loan out before you do so.
If you take out a loan from your thrift savings account, make sure you can afford the monthly payments with added interest. Also be sure that if you plan to leave federal service, you don’t do so before you pay back your outstanding loan balance. If you don’t, you’ll have to pay back the outstanding balance in one lump sum payment (including interest) within 90 days.
Failing to do so will result in default, and the outstanding loan balance is subject to federal income tax. One possible way to avoid taxes in that situation is to move your TSP taxable distribution into an IRA or retirement account sponsored by your employer.
Finally, since a TSP loan is a savings fund that already belongs to you, borrowing from your own money or account and paying it back won’t help build your credit. This is because your loan payments often aren’t reported to credit bureaus, so the only reason to take out a TSP loan is if you really need the funds.
Key Takeaways
- A TSP loan is money that federal employees and members of the uniformed services can borrow from their own special retirement accounts.
- There are two types of TSP loans, each with different designated purposes. The maximum amount that can be borrowed depends on several different factors, but the minimum amount is $1,000.
- TSP loans have low interest rates and are taken from your own savings, so they’re very low-risk.
- Payroll deductions are used to pay the loan amount back. That money is deducted and goes directly back into your thrift savings account.
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