A Thrift Savings Plan (TSP) is a retirement plan offered to uniformed service members or employees of the federal government. A TSP loan allows members of a TSP retirement plan to borrow against their own retirement savings and is very similar to a 401(k) loan.
For eligible borrowers who need extra cash to finance a large or unexpected expense, a TSP loan can be a logical solution. However, TSP loans do come with rules and potential costs, so be aware of these before choosing this option.
What is a TSP loan?
A TSP loan is a type of loan that allows federal employees or uniformed service members to borrow from their Thrift Savings Plan. Because you’re borrowing from your own savings, it’s typically easy to qualify for a TSP loan, although you may have to submit additional paperwork if you choose to use your loan funds for residential purposes.
TSP loans let you borrow from $1,000 to $50,000, provided you have enough money saved up in your TSP. You’ll have a maximum of five years or 15 years to repay the funds with a fixed interest rate, depending on the loan’s use, and payments can be automatically withdrawn from your paycheck.
How do TSP loans work?
With a TSP loan, you are essentially borrowing your own money with a specified period of time to pay it back. The interest rate charged will be equivalent to the G Fund rate (Government Securities Investment Fund) in the month your loan was approved. Much like a 401(k) loan, when you pay interest charges on a TSP loan, you’re paying them to yourself instead of to a bank or lending institution, because all of the money repaid goes back into your retirement account.
There are two types of TSP loans:
- General purpose: Can be used for any purpose, does not require documentation and has a repayment term of one to five years.
- Residential: Used only toward the purchase or construction of a primary residence, requires documentation and has a repayment term of one to 15 years.
TSP loan eligibility requirements
For both types of TSP loans, you must be a uniformed service member or a federal employee. Additional eligibility requirements include:
- You must have a minimum of $1,000 of your own contributions in your TSP account.
- You must not have repaid a TSP loan of the same type in the past 60 days.
- You must be in pay status, because TSP loan repayments will be deducted from your paycheck.
- You must not have had a taxable distribution on a loan within the past 12 months unless it is related to your separation from federal service.
Should I get a TSP loan?
Compared with other types of loans, TSP loans are fairly low risk — interest rates are low, and you’re borrowing from yourself rather than from a lender. If you need to borrow money for a purchase that you can’t afford out of pocket, a TSP loan is a good solution.
However, it’s also important to consider the costs and rules associated with TSP loans before you apply:
- There is a $50 processing fee per loan, which will be deducted from the loan amount.
- Most TSP loan borrowers will incur indirect costs in the form of sacrificed earnings, since the money you borrow for your loan won’t have a chance to accrue interest. Even though you’ll be paying interest back to yourself, that amount is often less than what you would have earned if the money had remained in your TSP account.
- When you pay interest back to yourself, you are doing so with after-tax dollars. This means that when you begin receiving disbursements from the account upon retirement, you will pay taxes again on the same funds.
- If you leave your federal job with an outstanding loan, you must either pay it back or go into default, in which case you must pay regular income taxes on the outstanding amount.
TSP loan FAQ
How much can you borrow from a Thrift Savings Plan?
The minimum you can borrow for a TSP loan is $1,000. The maximum is the lesser of:
- The amount currently in your TSP, minus outstanding loans.
- Half of your vested account balance or $10,000.
- $50,000, minus outstanding loan balances from the last 12 months.
You can have only one outstanding general purpose loan and one outstanding residential loan from a TSP account at a time.
Does a TSP loan affect your credit?
A TSP loan, like a 401(k) loan, does not appear on your credit report for the simple reason that it is your own money you’re “borrowing,” so the only person you owe it back to is yourself.
How long does a TSP loan take to get?
If you complete your application for a TSP loan online and are approved, you’ll get the money in seven to 10 days. Paper applications submitted by mail take up to several weeks to process.
The bottom line
If you are a uniformed service member or a federal employee, you may borrow a TSP loan from your own TSP retirement account. TSP loans can be helpful for consolidating debt or funding large expenditures like medical bills or home purchases. Though there are important things to consider when applying for a TSP loan, the loan’s low interest rates and easy qualification make it a solid alternative to personal loans or home equity loans.