How to borrow from a thrift savings plan?

Federal employees and members of the uniformed services may be eligible to borrow from their Thrift Savings Plan. A TSP loan allows participants to borrow from their retirement account to finance a large expense or cover emergency expenses. TSP loans are appealing because you are borrowing from yourself and they have a low interest.

You can borrow a TSP loan by filing an online application form on the TSP website. Start by logging in to your My Account at tsp.gov using your username and password, and use the online tool to fill out the required information, including the amount you want to borrow, the purpose of the loan, the agency you work for, whether you are married, etc. You may also be asked to provide certain documentation when filing out the application.

What is a TSP loan?

A TSP loan is a plan loan that allows eligible participants to tap their retirement savings and pay the money plus interest back into their account. TSP loans are similar to 401(k) loans since both plans allow participants to borrow from their retirement savings, but TSP loans are designed for federal workers and members of the uniformed services.

You can take either a TSP home loan or a TSP general-purpose loan. If you borrow a TSP home loan, you can use the loan proceeds to buy or build your principal residence, which can be a house, condo, mobile home, or RV home, as long as you will use the home as your primary residence. Unlike a traditional mortgage, a TSP home loan does not use your home as collateral for the loan. TSP home loans have a repayment period of up to 15 years.

If you take a general-purpose TSP loan, you can use the loan proceeds for just anything- paying medical expenses, college education, vacation, roof repair, buying a car, etc. General purpose TSP loans have shorter repayment periods than TSP home loans, and you will be required to repay the loan in one to five years.

How much can you borrow from a thrift savings plan?

The minimum TSP loan you can borrow is $1,000. However, TSP plans have various rules to determine the loan amount a participant can borrow from their retirement account.

Here are rules that guide the amount you can borrow from TSP:

You cannot borrow more than your total TSP contributions and earnings.

You cannot borrow more than 50% of your vested account balance, or $10,000, whichever is greater, less any outstanding loan balance.

You cannot borrow more than $50,000 minus the largest TSP loan during the last 12 months.

Based on these rules, the highest amount you can borrow from your TSP account is $50,000.

How to get a TSP loan

Before you start your TSP loan application, you should ensure you meet the minimum requirements for TSP loans. Typically, you must have at least a $1,000 account balance in the TSP account, be a current federal employee, and be in "active pay" status.

If you meet the TSP loan requirements, you can initiate the TSP loan process by logging in to My Account at tsp.gov. The TSP website has a tool that walks you step-by-step through the application process, and you should fill out the required fields and provide any required documentation. You can upload the documentation on the TSP website or mail it to TSP.

If you are a Federal Employees Retirement Service (FERS) participant and you are married, your spouse must sign the loan agreement to consent to the loan. Also, if you are applying for a TSP home loan, you may be required to provide documentation to show proof of the house you are buying or the house you want to buy.

You can complete the TSP loan application online. However, in some cases, you may be required to print the application form and send it to TSP via mail or fax. For online applications, you can get approved and receive a disbursement in 14 days. Mailed applications may take weeks to get approved and make a disbursement.

How to repay your TSP loan

You must start making TSP loan repayments within 60 days after receiving the disbursement. Usually, when TSP processes your loan, it must notify your agency's payroll office so that it can start making payroll deductions from your paycheck. The loan repayments go back to your TSP account, and they are invested based on your investment election.

If you have separated from service and you have an outstanding TSP loan balance, you will still be required to make loan repayments. You can decide to pay off the outstanding loan in one lump sum or keep making loan repayments by check, money order, or direct debit based on the same loan repayment terms as before separation. However, if you cannot afford the loan repayments, you can allow the loan to be foreclosed, and any unpaid loan balance will be treated as taxable income.

Should you take a TSP loan?

If you need to borrow money for an emergency or large purchase, a TSP loan may be a good option since it is a low-interest method of borrowing money compared to other high-interest loan options like personal loans and credit card debts. You can take a TSP loan to meet emergency expenses, buy a house, pay medical bills, and other large expenses.

However, there are some limitations with TSP loans. First, when you borrow money from your TSP account, you will miss out on the earnings you would have raked in had the money remained in the account. Although you will be paying interest to yourself, the interest earnings are often less than what you could have earned. Also, the interest payments are not tax-deductible, and you won’t benefit from an interest deduction when filing income taxes.