Borrowing from your retirement fund may feel counterintuitive. It is, after all, one of the places you put your money to save it for when you really need it. But sometimes our needs, as well as the timing of them, change in ways we couldn’t anticipate when we first started contributing to our Thrift Savings Plan (TSP).
Should that happen, you do have the ability to borrow money from your TSP. There are two types of loans within the plan available to federal employees, as well as several feasible reasons why it might make sense for an individual to take out such a loan. It’s all dependent upon your TSP balance, your other financial circumstances, and what’s best for you, your family, and your future.
How TSP Loans Work
If you meet certain loan eligibility rules (see the section on “TSP Loan Eligibility” below) and your loan request is approved, the amount of your loan is directly removed from your TSP account by borrowing specifically from the contributions and earnings you’ve made to your account. Your loan amount cannot exceed the amount of your own contributions and their earnings, and you cannot borrow from any matching contributions or earnings accrued from your associated agency or service.
When you take out a loan from your TSP, you will be required to pay it back, plus interest. These loans are repaid through deductions to each of your paychecks in order to restore the amount of your loan plus the associated interest to your account. If you fail to pay back the loan, it becomes taxable income and you will likely incur penalties and fees.
The interest rate on your TSP loan remains consistent with the G Fund rate at the time your loan application is processed, and this rate is fixed for the life of the loan. Although interest on your loan is not tax-deductible, all interest goes directly back into your TSP account. Daily interest on your loan is calculated as each payment made back to it is posted, and is based on a combination of the number of
days since the last loan payment, as well as your outstanding loan balance.
General Purpose Loans
There are two types of TSP loans you can take. The first is called a General Purpose Loan, and it sounds largely as its name suggests. A General Purpose Loan can be used for any reason you desire, and there is no specific documentation associated with applying for this loan. What that means is, the TSP will not ask what you plan to do with the money you borrow from your account in the process of applying for a General Purpose Loan.
A General Purpose Loan can be for anywhere between 1 and 5 years—you can elect how long you would like to take to pay it back within that window. But your loan payments must start within 60 days of your loan being sent to you.
The second type of TSP loan available is a Residential Loan. This is a loan you specifically take out to aid your primary place of residence. That could include contributing to the purchase of your primary residence, or for construction of your primary residence. You can take between 1 and 15 years to pay back this loan.
A Residential Loan requires specific documents that the property the loan is being used for is, in fact, your primary residence. As long as the loan is for your primary residence, it can be used for a:
• Mobile Home
• Recreational Vehicle
• Share in Co-Op Housing
You may not use a Residential Loan to refinance or pay your existing mortgage, add an addition to your current primary residence, renovate your existing residence, purchase only land, or buy out another person’s share in your primary residence. Because Residential Loans are not considered mortgages, your interest is not deductible on your tax return. Your loan payments much also start within 60 days of your loan amount being sent to you.
TSP Loan Eligibility
As expected, you must be an active federal employee or member of the uniformed services to take out either kind of TSP loan. If you leave federal service while still having an active TSP loan, there may be penalty fees, especially if you are under the age of 55. You must also be in “pay status” with your federal employer, because repayments of the loan are set up as payroll deductions. You must also not have repaid a loan of the same type in full within the last 60 days.
With both loans, you are required to borrow at least $1,000. That means you must have a minimum of $1,000 of your own contributions and earnings in your TSP account. You may borrow up to a maximum of 50% of your current vested account balance, with a maximum cap of $50,000. You are permitted to have a General Purpose Loan and Residential Loan at the same time, but the combined total of those loans still cannot exceed $50,000.
The Risks of TSP Loans
As with any type of loan and interest system, there are risks associated with taking out a TSP loan. The number one risk in this case would be that it might cause you to contribute less to your TSP. Ultimately, that could have a negative impact on what you will have available in retirement. And although you pay your loan amount back to your account with interest, the amount of interest paid may be less than what you could have earned if the money had remained in your TSP account.
Say you leave federal service prior to age 55; you will pay a 10% penalty plus taxes on any outstanding loan balance not repaid within 90 days.* The TSP will give you 90 days to repay the loan after you leave federal service first, though in some cases, that may be a difficult full-payment window to adhere to.
*This is a hypothetical example provided for illustrative purposes only; it does not represent a real-life scenario and should not be construed as advice designed to meet the particular needs of an individual situation.
Applying for a TSP Loan
You can apply for either type of TSP loan online by visiting your TSP “My Account” page. You can also print and mail in a paper application by using the TSP-20 form.
When you are approved for a loan, the TSP charges a loan fee of $50 for various administrative expenses, and this fee is deducted from your loan. So for example, if you take out a $5,000 loan, the amount paid to you will actually be $4,950.
Depending upon your marital status and how you would like to receive your funds, you may be prompted to take additional steps during the application process. Be sure to follow all requests for information closely, especially if it is specifically requested that you print, sign, and mail or fax your application.
Remember that if you’re married, your spouse has certain rights to your TSP account as well. So you must indicate on your application if you are married, because your spouse must also consent to your TSP loan by signing the agreement with you.
All loan and withdrawal strategies start with the basics of understanding your account, how it functions, and the rules and numbers associated with removing money from it. The TSP website has a useful Loan Calculator available to use free of charge that may help you estimate your loan payments based on the amount you want to borrow from your account, current loan interest rates, and other factors.
Federal Benefits Made Simple, an E.A. Buck Company is an independent financial services firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This firm is not affiliated with or endorsed by the US government or any governmental agency. E.A. Buck is an independent financial services firm, offering investment and insurance products to consumers. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investing involves risk, including the potential loss of principal. Any references to [protection benefits, safety, security, lifetime income, etc] generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. Insurance services offered through Federal Benefits Made Simple an E.A. Buck Company. MAS, AEWM, and Federal Benefits Made Simple, an E.A. Buck company are all separate entities. 01163196 12/21.