What’s a Thrift Savings Plan loan?

If you are a federal employee or a member of the uniformed services, you may be allowed to borrow money from your Thrift Savings Plan (TSP) account, similar to a 401(k) loan.  TSP allows individuals to borrow against their own savings, and make loan payments via payroll deductions.

A thrift savings plan loan allows federal employees to borrow against their TSP retirement savings for various purposes. You can borrow a residential TSP loan to purchase or build your principal residence, which could be a home, condo, RV, or boat. You can also borrow a general-purpose TSP loan, which is similar to a personal loan but can be used for any purpose. You can borrow from $1,000 to $50,000, and pay back the money over a repayment period of up to 5 years for a general-purpose TSP loan, or up to 15 years for a residential TSP loan.

What is a Thrift Savings Plan Loan?

A Thrift Savings Plan Loan is a type of plan loan that is available to federal employees and members of the uniformed services. It allows employees to borrow against their savings with a specific period to pay it back, along with interest. Since you are borrowing against your retirement savings, it is easy to qualify for this type of loan, regardless of your credit status.

You can use a TSP loan as a residential loan or a general-purpose loan. As a residential loan, you can use the funds to purchase or build your principal residence. This can be your home, condo, RV, or boat, as long as you will live in the residence most of the time. If you take a general-purpose TSP loan, you can use the funds for general expenses, large purchases, or even emergencies.

You can borrow between $1,000 to $50,000. However, the actual amount you can borrow depends on how much money you have in your TSP account, and whether you have an outstanding TSP loan. You can borrow half of your vested account balance up to a maximum of $50,000.

Who is eligible for a Thrift Savings Plan Loan?

The Thrift Savings Plan Loan is available to current federal employees. If you are a federal employee or member of the uniformed services and are interested in applying for this loan, be sure to learn more about the eligibility requirements.

In general, you must be a current federal employee and in active-pay status. You may also be required to provide proof of your income and employment status. Additionally, you must have a TSP account balance of at least $1,000. If you had borrowed a TSP loan earlier, you must have completed at least 60 days since you paid off the loan before you can apply for a second loan.

How to apply for a Thrift Savings Plan loan

You can apply for a TSP loan via your TSP account or through ThriftLine Service options that may include phone, fax, and mail.

To apply online, you’ll need to log in to TSP your account to initiate the loan application process. If you want to apply for a loan via phone, you can call the ThriftLine Service Center via phone at 1-877-968-3778 from 7 a.m. to 9 p.m. Monday through Friday.

You will pay an application fee when applying for a TSP loan. For a general-purpose TSP loan, you will pay an application fee of $50, or a $100 fee for a primary residence TSP loan. This fee will be deducted at disbursement, and you will receive a lower loan amount than what was approved. For example, if you were approved for a $20,000 primary residence loan, you will receive $19,900 after the fee is deducted.

If you are married, your spouse will be notified of the TSP loan, and they must consent to your loan. This applies to applicants who are FERS participants or CSRS participants. Without the spousal consent, your TSP loan may be disapproved, unless you qualify for an exemption.

You will be allowed to borrow a minimum of $1,000, or the lesser of 50% of your total TSP account balance up to a maximum of $50,000 less the highest outstanding loan balance in the last 12 months. The interest you pay on the loan will be the prevailing interest rate when the loan is processed, which will be the same as the G Fund’s rate of return.

How is a TSP loan disbursed?

If your TSP loan request is approved, your funds will be disbursed within three days. If the loan takes longer than that, you can log into your TSP account to track the loan status. Once the disbursement is made, you will receive a confirmation of the disbursement.

You can decide to receive the TSP loan via direct deposit or check. For direct deposit, the funds will be deposited into your bank account. You should confirm that the bank account information is correct by logging into your TSP account. Also, you can opt to receive the loan in form of a check. In this case, the plan will send you a check via your registered mailing address

How to repay your Thrift Savings Plan loan

Loan payments can start on the first pay date after loan approval and subsequent disbursement, but it must not be longer than 60 days since disbursement.

Typically, loan payments from borrowers who are current federal service employees are made through payroll deductions. This means that loan payments are deducted automatically from your paycheck every month. You can make monthly payments, or you can choose to pay off the loan in a lump sum.

If you change your job and move to another federal agency, or from uniformed service to another, you must instruct the new payroll office in your new agency to continue making deductions to pay the loan. If the agency takes longer to deduct loan payments, you can make loan payments via check, money order, or direct deposit to avoid missed payments.

However, if you leave the federal service, and you have an outstanding TSP loan, you must continue servicing the loan. You can make loan payments via check, money order, or direct debit. You can also make a lump sum loan payment to pay off the outstanding loan balance.

If you are unable to pay off the loan, the unpaid loan balance will be considered a withdrawal, and you could owe income taxes, and an additional 10% penalty if you are below age 59 ½. You can pay the unpaid loan balance using your own funds, and roll over the TSP to an IRA, 401(k), or other qualified retirement plans.

Pros of Thrift Savings Plan loan

Low-interest rates – the interest rates on Thrift Savings Plan Loans are typically much lower than the interest rate you would pay on a personal loan.

Easy application process – applying for a Thrift Savings Plan Loan is easy, and you can apply for a loan online via your TSP account.

No prepayment penalties- if you make a lump-sum payment or increase the monthly payments to pay the loan sooner, you won’t pay a prepayment penalty.

Cons of Thrift Savings Plan loan

Limited availability – not everyone is eligible for a Thrift Savings Plan Loan. You must be a federal employee or a member of the uniformed services to apply.

Doesn’t build credit- since TSP loan payments are not reported to credit reporting bureaus, a TSP loan won’t help you build credit.

Conclusion

If you want to borrow cheaply to buy your primary residence, make a large purchase, or for your emergency needs, a thrift savings plan loan may be a good option. However, this loan is only available to federal employees or members of the uniformed services who meet certain eligibility requirements. You can borrow a minimum of $1,000 up to $50,000, and repay the loan over a 5-year repayment period for a general-purpose TSP loan, or up to 15 years for a residential TSP loan.

Frequently asked questions about Thrift Savings Plan loan

Is it better to take a TSP loan or withdrawal?

If you need the money right away, a withdrawal may be the better option. But if you have time to repay the loan, a loan may be a better choice because you will pay back the loan payments to your TSP account with interest.

Can a TSP loan be denied?

Yes, a TSP loan can be denied if you do not meet the eligibility requirements. You must be a federal employee or member of the uniformed services to apply. Also, you must have a TSP account balance of at least $1, 000, and be a current federal employee.

What is the maximum TSP loan amount?

The maximum TSP loan amount is $50,000. However, you can only borrow the lesser of half of your vested TSP account balance up to a maximum of $50,000.

Can I use my TSP loan for anything?

If you borrow a general-purpose TSP loan, you can use the funds for anything, and you won't need to document how the funds will be used. However, for a residential TSP loan, you can only use the loan to buy or build your principal residence, and you must document how the funds will be used.

What happens if I can't repay my TSP loan?

If you can't repay your TSP loan, the unpaid loan balance will be considered taxable income. You will owe income taxes on the unpaid loan, and an additional 10% penalty if you are below 59 ½.