The True Costs of a TSP Loan

As a federal government employee or uniformed services member, you can borrow money from your Federal Employees Retirement System Thrift Savings Plan (TSP) retirement account.

But just because you CAN borrow from your TSP doesn’t mean you SHOULD. Yes, doing so can help with cash flow issues or home buying. It also means you’re trading today’s short-term solution for tomorrow’s financial resources.

The TSP Loan – A Quick Overview

Taking funds from your TSP means that you’re using them now, then paying yourself back (with interest) through payroll deductions.

TSP loan rules mandate that you’re an active Fed in “pay status,” with at least $1,000 in your account, and haven’t repaid a previous TSP loan within the past 30 days.

The available TSP loans are:

• General purpose. This loan can be used for any reason, has a one-to-five-year payback period, and $50 processing fee.
• Primary residence. This specific-purpose loan is used for buying or building a primary residence. The payback period is up to 15 years and has a $100 processing fee.

Some benefits of TSP borrowing include:

• No credit check or underwriting requirements
• Lower interest rates tied to the current G Fund
• Simple application process and fast approval
• No early withdrawal penalties or taxes (assuming on-time repayment)

Learn more about your retirement benefits at our No-Cost webinars, featuring Ed Zurndorfer –

The Hidden Costs of TSP Borrowing

The primary expenses of a TSP loan include processing fees and interest. But the major hidden cost is that the dollars you use now are no longer in the market. The funds aren’t compounding, reducing what’s available when you retire.

Then there are other costs such as:

• Fewer contributions. You may need to reduce your contributions to pay down the loan, which could reduce your retirement savings.
• Non-credit-building. TSP loans aren’t reported to credit bureaus, as you’re borrowing from yourself versus a third-party lender.
• Separation issues. If you leave your federal job before the loan payoff, you have three choices: Pay it off, make monthly payments, or don’t pay at all. If you decide on the latter, the loan will be foreclosed, with the remaining amount taxed as ordinary income. You could also be on the hook for early withdrawal penalties, depending on your age.

CERTIFIED FINANCIAL PLANNER® Checklist

If you’re considering borrowing money from your TSP:

• Calculate the cost-benefit analysis of borrowing versus paying yourself interest
• Establish exactly how much you need (and no more)
• Set up your payoff window in advance, and don’t deviate
• Ensure you continue contributing to the fund
• Set payroll deductions above the minimum payback amount
• Consider the consequences of job separation and missed payments

Know the TSP Loan Pros and Cons

Because of the hidden costs of borrowing from your TSP, doing so should be your action of last resort. Try other avenues first, like developing a strict budget, researching home equity or personal loans, or negotiating with creditors.

If there is no other way to handle your current situation, consider: borrow small, pay back quickly, and continue contribution to help protect long-term retirement resources.

Additionally, before beginning the paperwork, contact the specialists at Serving Those Who Serve. The experienced, Fed-focused CFPs® can help you determine the best solutions for your situation. These seasoned professionals can also provide guidance to setting up financial plans that support your goals.

Email [email protected] or visit the website to set up a no-obligation appointment to determine your financial objectives.

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. **

The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you’re eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.