How does a TSP loan work?

If you’re a federal employee or member of the uniformed services, you may be able to borrow money from your Thrift Savings Plan (or TSP) account.

While the purpose of a TSP account is to help save for retirement, a TSP loan might help you cover emergency expenses or even help pay for a new home. Both federal government employees and members of the uniformed services (which includes members of the military and more) may be eligible.

Like with most loans, if you take out a TSP loan, you’ll have to pay the money back within a set time frame.

A TSP loan may be attractive because payments are usually automatic through payroll deductions, so they come straight from your paycheck, which can make the loan easy to repay. They’re also appealing because you’re essentially borrowing from yourself — your TSP loan payments, including interest, go directly back into your account.

But TSP loans can also have some downsides that you should consider before deciding to borrow against your retirement. Let’s take a look.

• What is a TSP loan?
• How does a TSP loan work?
• Should I take out a TSP loan?

What is a TSP loan?

A TSP loan is a loan from a Thrift Savings Plan account. It allows eligible TSP account holders to borrow from their TSP savings and then pay back the money they borrowed, along with interest, to their account.

You can use a TSP loan as either a home (or residential) loan or a general-purpose loan — though unlike a mortgage, your home is not used as collateral, so your property isn’t at risk if you miss enough payments to default on the loan. But there are still risks in defaulting — more on that later.

TSP loans used as home loans can be used to buy or build a primary residence. And that can include a house, condo, mobile home, RV or boat, as long you’re going to live in it most of the time. TSP home loans must be repaid within one to 15 years, depending on the terms of the loan.

If you apply for a TSP residential loan, you have to submit documentation that you or your spouse is buying or building the home. You also have to document details like the address and how much you’re paying total to buy or build the home. If you’re building a new home, you need to provide the building permit, building receipts and other documents.

Your other option is to take out a general-purpose TSP loan for general expenses or a large purchase. You’ll have to repay this type of loan within one to five years, depending on the loan term. You don’t have to document what you’re using the money for when you apply for a general-purpose loan, so there’s less paperwork involved.

How does a TSP loan work?

Taking out a TSP loan is similar to borrowing from a 401(k) — it’s a way of taking money out of your own retirement savings, to be paid back into your account within a set time frame. With both a 401(k) loan and a TSP loan, your employer deducts money from your paycheck, and that money is used to repay the amount you borrowed plus interest.

The interest rate you’re charged for a TSP loan is based on the interest rate of the G Fund, which is a money-market retirement fund that federal employees can invest in. For the entire term of your loan, you pay an interest rate that matches the G Fund rate on the date your loan was generated.

On top of paying interest, you’ll pay a $50 administrative fee to take out a TSP loan.

The minimum amount you can borrow is $1,000. The maximum depends on factors like how much you have in your TSP account and whether you already have another TSP loan. In some cases, the maximum can be as high as $50,000. You can take out both a home loan and a general-purpose loan, but an account generally can’t have more than one of each loan out at the same time.

If you leave federal service while you have a TSP loan, you’ll have to close the loan within 90 days of the date when your agency or service reports your separation.

Here are your options for repayment if that happens.

• Fully repaying the loan
• Partially repaying the remaining balance and taking a taxable distribution on your outstanding loan balance
• Taking a taxable distribution on your entire outstanding loan balance

If you don’t repay the loan in full, you’ll have to pay federal income tax on the unpaid balance. You may also have to pay an early-withdrawal penalty of 10% to the IRS if you’re younger than 55.

You may be able to avoid taxes and penalties by rolling over your taxable distribution into an IRA or employer-sponsored retirement fund.

Should I take out a TSP loan?

A TSP loan may be right for you if you have at least $1,000 of TSP contributions in your account, you need money to pay for a primary home or for other needs, and you expect to have room in your budget to cover repayment over the term of the loan.

But there are some downsides to borrowing from your TSP account. If you can’t afford to continue making your usual contributions to your account while you repay the loan, you could end up with less money for retirement than you would’ve had otherwise. And if the rate of return on investments in your account is higher than your interest rate, taking out a loan will mean you miss out on those higher earnings.

Also, your interest payments are not tax deductible. If you borrow from a TSP account instead of using a traditional mortgage loan, you don’t benefit from a potential mortgage interest deduction.

Because borrowing from your account can lead to having less money for retirement, you may want to consider other types of loans before drawing on your retirement savings with a TSP loan.

What’s next?

Explore possible repayment schedules for a TSP loan and calculate the loan amount you’d like to borrow. Compare the costs to the APR of other loans, such as mortgages and personal loans. And take a look at credit cards that you might be able to use to cover general purchases instead (particularly credit cards with a low intro APR offer).

Weigh the costs and benefits of each financing option before making a decision, and make sure that the loan or credit card payments fit into your budget.