It can feel strange to borrow money from your retirement fund. After all, that’s where you save money to use later. But sometimes, our needs change in ways we couldn’t have predicted when we first started saving for retirement.
If something happens and you need money, you can borrow money from your TSP. There are two types of loans: one for people who work for the government and one for people who don’t work for the government. It all depends on how much money you have in your account, your other financial circumstances, and what is best for you.
How TSP Loans Work
Suppose you meet the eligibility rules and your loan request is approved. In that case, your loan amount will be taken directly from your TSP account. It will happen by borrowing specifically from the contributions and earnings you’ve made to your account. Your loan amount cannot exceed the number of your contributions and their earnings. You cannot borrow from any matching contributions or earnings accrued from your associated agency or service.
You must refund any money borrowed from your TSP with interest. It happens by taking money out of each of your paychecks. The loan is paid back over time until the amount plus the interest is deposited into your account. If you do not pay back the loan, it becomes taxable income, and you may have to pay penalties and fees.
Your TSP loan’s interest rate is the same as the interest charged by the G Fund. This interest rate will stay the same for the life of your loan. Although you can’t deduct the interest on your loan from your taxes, all the interest goes back into your TSP account. The interest you pay is calculated daily based on how many days have passed since your last payment and how much money you still owe on your loan.
General Purpose Loans
There are two types of TSP loans. The first is a General Purpose Loan. This loan can be used for any reason you want. There is no special documentation needed to get this type of loan. That means the TSP will not ask what you plan to do with the money you borrow from your account when you apply for a General Purpose Loan.
Between one and five years are available for you to choose how long you want to take to repay your loan. But you must start making payments within 60 days of getting the loan.
The second type of TSP loan accessible is a Residential Loan. It is a loan you apply for and uses to improve your primary residence. Contributions to purchasing or constructing your primary home might be one example. You must pay back this loan over a period ranging from 1 to 15 years.
To get a Residential Loan, you must provide documents proving that the property you use the loan for is your primary residence. As long as the loan is for your primary residence, it can be used for some different things like:
• Mobile Home
• Recreational Vehicle
• Share in Co-Op Housing
You cannot use a Residential Loan to refinance or pay your current mortgage. You also cannot use it to 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. It is because Residential Loans are not considered mortgages. It means that the interest you pay on your loan is not deductible on your tax return. Your loan payments must also start within 60 days of receiving the money from the loan.
TSP Loan Eligibility
To get a TSP loan, you must be an active federal employee or member of the uniformed services. Suppose you leave federal service while still having an active TSP loan. In that case, there may be penalties, especially if you are under 55. You must also be in “pay status” with your federal employer because the loan repayments are set up as payroll deductions.
You cannot borrow money from your TSP account if you have done so in the last 60 days. You must borrow at least $1,000. It means that you need to have at least $1,000 saved up in your account. You can borrow up to 50% of your account balance, with a maximum loan of $50,000. You can have more than one loan at a time, as long as the total amount of all loans does not exceed $50,000.
The Risks of TSP Loans
You are taking on a risk when you take out a loan from your TSP account. The biggest risk is that you might not contribute as much to your TSP account in the future. It could mean that you will have less money saved for retirement. Although you pay back your loan with interest, you may earn less interest than if the money had stayed in your TSP account.
Applying for a TSP Loan
You can get a TSP loan by going to your “My Account” page on the TSP website. The TSP-20 form also allows you to print and mail a paper application.
When approved for a loan, the TSP charges a loan fee of $50 for various administrative expenses. This fee is deducted from your loan amount. For example, if you take out a $5,000 loan, you will only receive $4,950.
It’s crucial to remember that, depending on your marital status and how you wish to get your money, the application procedure may require you to take additional steps. Make careful note of any requests for information, particularly if they are specifically requested that you print, sign, and mail or fax your application.
Remember that your spouse has certain rights to your TSP account if you are married. You must indicate on your application if you are married because your spouse must also agree to the TSP loan and sign the agreement.
To start, you need to understand your account and how it works. It includes the rules and numbers associated with withdrawing money. You can use a free loan calculator on the TSP website. To help you estimate your loan payments based on the amount you want to borrow, current loan interest rates, and other factors.
What Is a TSP Loan?
A Thrift Savings Plan loan, often known as a TSP loan, enables federal employees or members of the uniformed services to borrow money from their Thrift Savings Plan accounts. This loan is easy to qualify for because you borrow from your savings. However, you may need to submit additional paperwork if you want to use the loan for residential purposes.
TSP loans let you borrow money, from $1,000 to $50,000. You have to have enough money saved up in your TSP account. The loan has a fixed interest rate, and you must pay it back within five or fifteen years. The payments will be taken out of your paycheck automatically.
There are two types of TSP loans:
- General purpose
- No proof of necessity is required for these mortgages. One to five years to repay the debt.
A mortgage is a type of loan used to buy a house. The repayment term for this type of loan is one to fifteen years. You will need evidence to demonstrate your eligibility for this loan.
How Do TSP Loans Work?
You will borrow your own money if you take out a TSP loan. You will have to pay the money back within a certain time. The interest rate for your loan will be the same as the interest rate for the G Fund (the Government Securities Investment Fund) in the month your loan was approved.
Just like with a loan from your 401(k), when you pay interest on a TSP loan, you’re spending it on yourself. It differs from loans from banks or other lending institutions because all the money you repay goes back into your retirement account.
How to Get a TSP Loan
You are able to apply for a TSP loan online. It is possible to do so by entering into your account at www.tsp.gov. You may be able to complete the entire loan application procedure online. However, if you are asked to print the loan request, ensure all the information is correct. In addition, make sure to include any requested documentation, which you can either upload to your account or send by mail or fax.
Before you decide whether or not to print the form, you should be aware of a few facts. For instance, your marital status, the kind of TSP loan you want, or the way you want to receive the loan are all factors that will be considered. Suppose you’re married, a participant in the Federal Employees Retirement System, or a uniformed service member. In that case, your spouse must sign the Loan Agreement. They will also be notified if you apply for a TSP loan as a Civil Service Retirement System participant. In rare cases, there have been exceptions to TSP loan rules regarding spousal consent.
TSP Loan Eligibility Requirements
To get a TSP loan, you must be a military service member or a federal employee. It would be advantageous if you also met the following requirements:
- Have a minimum of $1,000 of your contributions in your TSP account.
- Not have repaid a TSP loan of the same type in the past 60 days.
- Be in pay status because TSP loan repayments will be deducted from your paycheck.
- You haven’t had a taxable loan distribution in the past year unless it’s tied to leaving government service.
- Only have one general-purpose TSP loan and one residential TSP loan per account at any time.
- Do not have a court order placed against your TSP account.
Should You Get a TSP Loan?
TSP loans are lower risk than other forms of borrowing because interest rates are low, and you’re borrowing from yourself rather than a lender. A TSP loan is an excellent option if you need money to buy something you can’t afford on your own. However, it’s worth thinking about the costs and restrictions associated with TSP loans before you apply:
- There is a $50 processing fee per loan, which will be deducted from the loan amount.
- When you lend money from your TSP account, you will not earn interest on that money. It is because you will pay back the borrowed money with interest. However, it is often less expensive to borrow from your TSP account than it is to earn the same amount of interest in a different account.
- When you pay interest back to yourself, you are doing so with money already taxed. When you begin receiving payments from the account upon retirement, you will have to pay taxes again on the same funds.
Make sure that you can afford to repay the monthly TSP loan payments. Use the Thrift Savings Plan loan payments calculator to determine how much you can expect to pay each month.
Disadvantages of a TSP loan
Although borrowing against your savings is a low-risk way to get money, it’s not always the best idea. For example, borrow money from your TSP account. It won’t help you build or improve your credit score because the payments aren’t reported to credit bureaus. Also, if you take out a TSP loan, you might have to pay taxes twice- once when you get the loan and again when you withdraw the money later in retirement.
If you leave your federal job with an outstanding loan, you will have to pay it back in one lump payment or face default. It can lead to other tax and credit-related complications.
Minimum and Maximum Loan Amounts
A TSP participant can borrow up to $1,000. The smallest amount a TSP participant can borrow is the number of their contributions and earnings on those contributions in the account from which they plan to borrow.
It does not include any money that you owe on loan. You will get $10,000 if you have been part of the company for at least five years and your total account balance is more than $20,000. If you owe money on loan, that amount will be deducted from the $10,000. You can get $50,000 minus how much you owe on your loans.
Where does the Loan Comes From, and Is it Repaid To
A TSP loan is taken from a traditional and Roth TSP account. Suppose the TSP account is invested in more than one fund. In that case, the loan is taken from the employee contributions and earnings on the TSP participant’s contributions to each fund.
When you repay your TSP loan, the payments (including interest) are placed back into your conventional and Roth TSP accounts in the same proportions as when you borrowed it. The repayments are invested in TSP funds according to your contribution allocations.
The annual interest rate on a loan is the G fund’s interest rate that was in force on the date the TSP loan agreement was generated.
Why TSP Loans Should Be Avoided
There are four reasons why you should avoid TSP loans. The reasons are below. Most people who have contributed to their TSP over the years have done so with traditional (before-taxed) accounts, so it is assumed that TSP loans come from those accounts.
- Reason 1. When someone contributes to the traditional TSP, the government takes less money from their salary. It is called “gross salary.” But when someone takes out a loan from the TSP, they have to pay back that money with money that has been taxed. It is called “net salary.”
- Reason 2. When you lend money from your TSP account, you must pay taxes on it twice. The first time is when you use money from your bank account to pay back the loan. The second time is when you retire and take money out of your TSP account. Some of the money you take out will be from the loan, and some will be taxed again.
- Reason 3. If you miss a payment on your TSP loan, the TSP will have a plan to help you make up for the missed payment. It is called the “cure” period. If you miss payments after the “cure” period, you will be considered defaulting on your TSP loan. If you do not repay your TSP loan, the IRS will consider the unpaid loan balance as income. You must pay income tax on the unpaid balance. Additionally, if you are younger than 59.5 years old, the loan will be considered an early distribution. It means that there will be a 10 percent penalty on balance.
- Reason 4. If a person leaves or retires from Federal service with a TSP loan, they have up to 60 days to repay it. If the person does not reimburse the loan in full, they will have to pay taxes and penalties, just like someone who had defaulted on their loan.
Another reason to avoid TSP loans is that the money you borrow will not generate any income. (interest, dividends, or capital gains) until you repay it.
As a TSP participant, you’re allowed to borrow from your account. You could be tempted to borrow money, but you should consider the effects of taking out a loan on your retirement savings. It might cost you more than you think.
When you take a TSP loan, you use up your savings. That means you stop earning interest on those savings. Plus, you must pay back the loan with interest. And the loan fee is taken out of the total loan amount.
Remember: The purpose of contributing to the TSP is to provide you with income in retirement, so it is essential to think carefully before taking a TSP loan. The interest rate for new loans is 2.875%.
Your loan in a Non-pay Status
If we notice that you have stopped making your loan payments while you still owe money, we will stop your payments. While your payments are stopped, the interest on your loan will continue to add up. However, you can still make payments on your own to reduce the amount of interest that accumulates.
Your loan payments will be paused if you are not working because you are doing military service. It will last until you go back to work or for one year, whichever happens first. If this is longer than one year, your maximum loan time will be extended for the same amount of time you were in military service.
It seems that TSP loans can be a good option. If you need a loan and don’t have any other options, then a TSP loan might be your best choice.
However, borrowing money to make a better investment can be risky. If you lose money on your investment, or if it earns less than you would have if you had just left the capital alone, you could end up with a lot less money when you retire. And if you can’t pay the money back yourself, the loan could be taxed as income. It means that you will have to pay taxes on it, and you may also have to pay early withdrawal penalties.
Frequently Asked Questions About TSP Loans
Can I Take a Loan From My TSP?
As a TSP participant, you can borrow from your account. Although it might be tempting to take out a loan, you should think about the consequences first. You borrow money from your account when you take out a TSP loan. It means that you will have less money saved for retirement.
What Is the TSP Loan Rate?
The TSP loan has a fixed interest rate that is currently very low: 0.875% at the time of publication. The rate in effect when the loan was made will stay the same for the life of the loan. You can use the TSP.gov loan payment calculator to figure out how much your monthly payments will be.
How Many Loans Can You Take From TSP?
TSP participants can have one general-purpose loan and one residential loan simultaneously. It is a limit for each participant, not for each account. Suppose a participant has both a civilian account and a uniformed services account. In that case, the participant can have one of each type of loan for each account.
Does a TSP Loan Affect Your Credit?
You are using your funds when you borrow from the TSP. There is a $50 fee, and it doesn’t impact your credit score. You only pay interest that is equivalent to the G Fund’s returns. You are also repaying that interest to yourself.
Does a TSP Loan Count As Debt?
The TSP loan does not show up on credit reports. Because it is your own money and not a loan, this is the reason. On the application for the mortgage, you don’t need to reveal the loan from the TSP. Because you can’t give money to yourself to borrow, that’s why! If you are asked to provide the source of your funds, you can say that the money came from your retirement savings.
How Long Does It Take to Get a TSP Withdrawal Direct Deposit?
It generally takes 7 to 10 business days to process your request once you’ve correctly completed and submitted it. We disburse withdrawals each business day. You can check My Account at tsp.gov or call ThriftLine to find out the status of your withdrawal request, including whether the payment has been made.