TSP Loans: Understanding Your Options and Making the Right Decision

A Thrift Savings Plan (TSP) loan can be a useful tool for federal employees who need access to funds while still employed. However, there are several important details to consider before deciding if this option is right for you. Here’s a closer look at the types of TSP loans, the process, and key considerations to keep in mind.

Eligibility and Loan Types

TSP loans are available while you are still working, and the entire process can be completed online, including e-signatures. If you’re interested, visit your TSP account to see how much you can borrow, either via the website or the mobile app, or call the Thriftline.

It’s also worth checking out the loan modeling tool to explore different scenarios before making a decision.

There are two types of loans you can take:

1. General Purpose Loan: The repayment period ranges from 12 to 60 months. You don’t need to provide documentation for how the loan will be used.
2. Primary Residence Loan: The repayment period is 61 to 180 months. This loan can only be used to buy a primary residence and will require documentation, including a future closing date and closing costs.

Note thatyou cannot start a new loan after you’ve separated from service, but if you took out a loan while still active, you can continue repaying it.

You can also take out two general-purpose loans at the same time, or one general-purpose and one primary residence loan. In other words, you can’t take out two primary residence loans.

Loan Process and Bank Setup

Once you’ve decided to take a TSP loan, make sure your bank account details are set up in your profile at least seven calendar days before you want the loan funds deposited. This step is crucial to avoid any delays in getting your money.

Repayments are made through payroll deductions, and while the loan amount is calculated based on your overall TSP balance, you can only borrow from your own contributions—not the employer matching portion. Keep this in mind, especially if you have a significant employer match.

Fees and Loan Terms

There is a small fee for processing a loan:

• $50 for a general-purpose loan
• $100 for a primary residence loan

These fees will be deducted from the loan amount you receive.

As you begin repayments, it’s essential to understand that while you are repaying yourself, you lose out on potential gains from the funds that are no longer invested in your TSP. Consider whether the loan is worth this opportunity cost.

Restrictions: Divorce or Court Orders

If you’re in the midst of a divorce or there’s a court order against your account, your TSP will be on hold, and you will not be able to take out a loan during this time. Be mindful of these restrictions when considering a loan, as they can delay the process.

Repayment Flexibility and Limits

One important thing to note is that once you set up your loan repayment schedule, you have some flexibility to repay in full or partially within the first 90 days. After that, you can extend payments beyond 90 days, but once you do, you cannot adjust the repayment term any further. For example, you could set up a six-month repayment plan, but once established, you can’t change it beyond that time frame.

Additionally, TSP loans are repaid from your traditional and/or Roth contributions. This has potential tax implications depending on which portion of your contributions you use.

Taxable Distribution and Loan Foreclosure

If you fail to repay your loan, the unpaid balance is considered a taxable distribution, which the TSP now refers to as a “loan foreclosure.” While the term may sound concerning, it simply means the unpaid portion becomes subject to taxes and possibly penalties. This is something to be aware of when borrowing from your TSP.

Primary Residence Loan Considerations

For a primary residence loan, you can only borrow up to the amount shown in your documentation (e.g., your closing costs and down payment). Even if your TSP shows a higher maximum borrowing limit, you are restricted by the amount required for your home purchase.

For instance, if your TSP shows that you can borrow up to $100,000, but your closing costs and down payment total $40,000, that is the maximum amount you can borrow for the primary residence loan. However, you could potentially use the remaining $60,000 for a general-purpose loan, which has shorter repayment terms.

The Bottom Line: Weigh the Pros and Cons Carefully

While taking a TSP loan allows you to borrow from yourself, it’s important to remember that you are missing out on potential growth in your retirement funds while the loan is outstanding. Run the numbers carefully to see if taking a loan is the best option for your financial situation.

For more information, visit the TSP loan section on TSP.gov to access booklets, the current loan interest rates, and more helpful resources.