Explaining TSP Loan Options: When, Why, and How to Use Them Wisely

As a federal employee, your retirement benefits include a Thrift Savings Plan (TSP). This defined contribution arrangement lets you allocate part of your income to indexed mutual funds or Roth options to save for retirement. 

For the things that pop up in the shorter term, you do have the option of taking a short-term loan from your TSP to help with things like unexpected bills, debt consolidations, or homeownership. Before jumping into a TSP loan, however, you should understand what’s involved in the process and the unique benefits and drawbacks.

TSP Loan Options for Federal Employees

In general, there are two types of TSP loans available:

• General purpose. As the name suggests, the general purpose loan can be used for anything you want. You don’t need to state a reason for the funds. This loan type doesn’t need documentation but does require a one-time $50 fee. The repayment period is 12 to 60 months.
• Residential. These loans are used to buy or build a primary residence by funding transaction costs like down payments, closing costs, or other fees. Residential loans require documentation, a one-time $100 fee, and have a 61-to-180-month repayment period.

Loan Eligibility

To borrow against your TSP, you must:

• Be currently employed in a federal government job or an armed forces member
• Be in active pay status (as repayments are made through payroll deductions)
• Not have repaid a TSP loan of any kind within the past 30 days
• Have a minimum of $1,000 in contributions and earnings in your TSP account
• Have only two TSP loans at any one time (two general purpose loans or one residential loan and one general purpose loan)

Minimums and Maximums

The minimum borrowing amount is $1,000. Determining the maximum amount is more complex, involving one of the following:

• The current total account balance (less outstanding loan balances)
• 50% of the total account balance or $10,000, whichever is greater (less outstanding loan balances)
• $50,000 (less your highest outstanding loan balance within the past 12 months)

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TSP Loans: Pros and Cons

As with many loan types, TSP loans have their upsides and downsides, such as the following:

Pros

• Lower interest rates. Rates are based on those calculated for the Government Securities Investment Fund, which are lower than other interest rates.  
• No required credit check. With a TSP loan, you’re borrowing from money you already have rather than an external lender. You don’t have to prove your creditworthiness.
• Paid interest returns to your TSP accounts. All repayments (including interest) end up back in your traditional and Roth accounts.

Cons

• Savings growth interruption. A TSP loan decreases your account balance. This, in turn, reduces compound interest growth on your account, potentially leaving you with less when you retire.
• Potential for double taxation. Your after-tax dollars repay the loan and interest. If the loan comes from a traditional fund (rather than a Roth option), you’re taxed on those repayments AND funds withdrawn during your retirement.
• Separation issues. If you leave federal employment with an outstanding TSP loan balance, you must either pay the loan off or set up a repayment plan. Failure to do so results in a default, in which the entire loan balance is taxable.

Supporting Your Financial Health

Although your TSP’s primary role is that of a retirement savings tool, you can borrow against the funds if you absolutely need to. We’d recommend considering other options, though, including emergency savings, a home equity line of credit, or federal or private hardship assistance programs.

Also, before taking out a TSP loan, reach out to the experts at Serving Those Who Serve to help identify the best option for your personal financial health. For more information, reach out to us at [email protected].

To learn more about how you can be maximizing your TSP in the context of your retirement planning, register to attend our next free TSP Planning webinar by clicking here!

The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers  and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **