What Are TSP Loans and How Do They Work? (2024 Guide) (2024)

TSP loans are a feature of the Thrift Savings Plan, a retirement savings platform for federal employees and uniformed service members. This type of loan allows you to borrow money from your own contributions to your TSP account.

Much like a 401(k) loan, TSP loans are dictated by guidelines set forth by the federal government.

The mechanism behind TSP loans involves borrowing from your own TSP account, which you repay with interest over a defined period. Interestingly, the interest paid finds its way back into your TSP account, which means that you are essentially paying the interest to yourself.

However, these loans come with strict repayment guidelines, and non-compliance could lead to hefty tax penalties.

To apply for a TSP loan, you simply need to log in to your Thrift Savings Plan account online and follow the instructions there. You’ll need to have at least $1,000 in your account to be eligible.

The minimum you can borrow is $1,000, but the maximum amount you can borrow is based on how much money is in your account. In general, you can borrow up to 50% of your account up to a maximum of $50,000.

The method of paying back the loan is quite straightforward: Loan repayments are usually set up as payroll deductions, which facilitate a disciplined repayment strategy and help prevent tax penalties.

This loan features predefined loan limits and a repayment tenure, which generally spans from one to five years. However, when the loan is used to purchase a primary residence, the term can stretch up to 15 years, offering more flexibility.

Imagine borrowing $15,000 from your TSP at the current rate of 4.125% interest. Over five years, you return the borrowed sum and the interest. This interest isn’t lost; it replenishes your TSP funds.

But there’s a caveat: Your retirement nest might grow more slowly during this period since the funds aren’t invested in the market.

TSP loans come with both perks and drawbacks.

Pros of TSP Loans

• Low interest rates: Rates on TSP loans are more appealing compared to what traditional loans typically offer.
• No credit checks: You’re borrowing your own money, so no credit check is needed.
• Flexibility: Use your TSP loan for various needs, from emergencies to securing a primary residence.
• Interest is returned to you: The interest you pay is deposited back into your TSP account.
• Speedy repayment: There are no prepayment penalties on TSP loans.

Cons of TSP Loans

• Mandatory fees. You’ll pay a one-time fee on all TSP loans. This is $50 for a general purpose loan, or $100 for a loan used to buy a home.
• Stunted growth: Taking a portion of your TSP contributions means the money is no longer benefiting from investment growth, so your retirement fund might lag a bit.
• Caps on borrowing: There’s a limit to how much you can borrow from TSP loans, which is based on a percentage of your contributions and earnings and is typically capped at $50,000.
• Tax troubles: Messing up repayments could land you in hot water during tax season. If your loan goes delinquent, your entire loan will be treated as taxable income and you may also need to pay a steep 10% early withdrawal tax penalty if you are under age 59 ½.

Acquiring a TSP loan demands a structured approach. This section explains each step involved in securing a TSP loan, right from establishing your eligibility to initiating regular loan payments.

Assess Loan Eligibility and Loan Type

Your journey toward obtaining a TSP loan begins with evaluating your eligibility. This step involves verifying your employment status in federal service and ensuring your TSP account balance meets the predefined threshold to qualify for a loan.

Additionally, you will need to decide which type of TSP loan is right for you. A general-purpose loan can be used for any need but has a shorter loan term (12 to 60 months). A residential loan must be used to purchase a primary residence and has a longer loan term (61 to 180 months).

During this phase, you may wish to consult with a financial advisor who can help you assess your goals and options.

Determine Loan Amount

Next, calculate the amount you’d like to borrow. You are allowed to borrow a minimum of $1,000 to a maximum of 50% of your account balance or $50,000, whichever is lower. It’s prudent to carefully evaluate your financial needs and borrowing capacity to avoid jeopardizing your retirement savings.

As you determine the loan amount you can withdraw, keep in mind the interest rate and your repayment capacity. Online loan calculators may be a handy tool.

Complete Necessary Documentation

Following the determination of the loan type and amount, you’ll need to complete the documentation. This step is particularly significant for residential loans where proof of a primary residence purchase or construction is required. To prevent delays, make sure that you accurately fill out all documents and provide the necessary proof of identity and eligibility.

Submit Loan Request

Once the paperwork is set, the next step is to formally submit your loan request. This can be done through the TSP website or by mailing a paper loan application available for download on the TSP website. Double-check all entries and attachments before submission to facilitate a smooth approval process.

Repay Loan as Scheduled

Meeting the repayment schedule of a TSP loan is not merely a contractual obligation but also a critical step in safeguarding your financial future. Regular repayments, which are typically deducted directly from your paycheck, ensure the steady replenishment of your retirement fund.

Note that delays or defaults on repayments can incur penalties and tax liabilities, potentially affecting your credit score. Furthermore, timely repayments allow for the smooth transition of the repaid amount back into your investment mix.

The primary eligibility criteria for a TSP loan revolve around your employment status and the balance in your TSP account. To be eligible, you must be currently employed by the federal government or a member of the uniformed services. You must have a minimum account balance, which varies depending on the type of loan you are applying for — general purpose or residential.

In the context of loan restrictions, it’s important to understand there are different types of TSP loans, each with specific criteria and purposes. General-purpose loans, which can be used for any reason, have a repayment period of one to five years. In contrast, residential loans, aimed at assisting with home purchases or constructions, have a longer repayment period of up to 15 years.

Another critical aspect to consider is the existence of previous loans. The TSP plan allows for two loans at a time, and new loans cannot be initiated within 60 days of fully repaying a previous loan.

Lastly, documentation plays a significant role in the application process. Borrowers are expected to provide the necessary paperwork, which might include proof of employment, a demonstration of the intended use of funds (especially for residential loans) and any other documentation deemed necessary by the TSP.

Deciding when to take a TSP loan can often be a bit tricky. Experts often advise against borrowing from retirement savings. But there are times when a TSP loan might make sense, especially if you find yourself in a tight spot financially. These loans offer a way to access your savings without the penalties and taxes you’d face if you just withdrew the money outright. It’s a little like borrowing money from yourself, and that can be a comforting thought during uncertain times.

In some instances, emergencies might pop up that require immediate financial attention. This could be sudden medical expenses, urgent home repairs or unexpected education costs. During such times, a TSP loan can provide you with the necessary funds swiftly and with fewer hurdles than a traditional bank loan. The main goal here is to handle the emergency without derailing your future financial plans.

Furthermore, there might be situations where you are grappling with high-interest debt from credit cards or other loans. In these cases, a TSP loan can help you consolidate this debt, effectively lowering the interest rate and simplifying your repayment plan. By doing this, you can potentially save a substantial amount of money in the long run, making your financial journey smoother and less stressful. However, it’s essential to approach this strategy with caution, ensuring that you don’t fall into a cycle of continually borrowing against your retirement savings.

But what about the more pleasant aspects of life, like buying a new home or investing in further education? Here too, a TSP loan can come to your aid. It can provide the financial boost needed to secure a home or to cover education expenses, helping to facilitate significant life milestones without exhausting your other financial resources.

Yet even with these seemingly positive scenarios, it’s recommended to weigh the decision carefully. Always consider the impact on your retirement savings and ensure that the loan doesn’t derail your long-term financial goals. The key here is to make a well-informed decision with a clear understanding of both the benefits and potential downsides of a TSP loan.

Navigating through the various facets of TSP loans can initially seem a bit overwhelming, but it’s vital to understand their potential benefits and drawbacks. Taking a loan against your Thrift Savings Plan is essentially borrowing from your future self, so a well-thought-out strategy can go a long way in securing your financial stability in the years to come.

Before you decide to apply for a TSP loan, be sure to understand the eligibility criteria and the repayment schedule. Always bear in mind that the ultimate goal is to foster a secure and comfortable retirement, and every financial decision taken today should align with this long-term objective.

Divi Sharma Contributor

Divyakshi Sharma is a professional copywriter and a proud North Carolina State University graduate. Divi is the CEO and founder of Writeable: A Copywriting Agency and works with a variety of different brands, including Atlas Obscura, Bigmouth Copy and Gale Creative Agency. While her 9-to-5 is running her own business, her weekends are filled with hiking, yoga, reading Letterboxd reviews and conducting mostly successful food experiments.

Jen Hubley Luckwaldt Editor

Jen Hubley Luckwaldt is an editor and writer with a focus on personal finance and careers. A small business owner for over a decade, Jen helps publications and brands make financial content accessible to readers. Through her clients, Jen’s writing has been syndicated to CNBC, Insider, Yahoo Finance, and many local newspapers. She is a regular contributor to Career Tool Belt and Career Cloud.