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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 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, there are TSP loan rules and potential costs involved to be aware of before taking one out.
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 a minimum of $1,000, but the maximum you can borrow is reliant on a few factors. For example, you can’t borrow over 50 percent of your vested account balance or $10,000, whichever is more and you can’t take out over $50,000 minus any TSP loans taken out in the past year.
Depending on the loan’s use, you’ll have a maximum of five years or 15 years to repay the funds with a fixed interest rate, and payments can be automatically withdrawn from your paycheck.
There are two types of TSP loans:
- General purpose. These loans can be used for any purpose, do not require documentation and have a repayment term of one to five years. They come with a $50 processing fee.
- Residential. Used only toward the purchase or construction of a primary residence, this type requires documentation and has a repayment term of one to 15 years. They come with a $100 processing fee.
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 TSP loan 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.
How to get a TSP loan
You can apply for a TSP loan online by logging into “My Account” at www.tsp.gov. You might be able to complete the entire loan application process online. However, you might be asked to print the loan request. If prompted to print the application, ensure that all fields are correct, and include additional documentation that’s asked of you. You can either upload the paperwork to your TSP account or send it by mail or fax.
Whether you’re required to print out the form depends on a few factors. For example, your marital status, the TSP loan type requested, or how you’ve chosen to receive the loan funds.
If you’re a Federal Employees Retirement System participant or a uniformed service member and are married, your spouse must sign the Loan Agreement to signify their consent. Similarly, your spouse will be notified if you are applying to a TSP loan as a Civil Service Retirement System participant. In rare circumstances, there have been exceptions to TSP loan rules regarding spousal consent.
TSP loan eligibility requirements
For both types of TSP loans, you must be a uniformed service member or a federal employee. Additionally, you must:
- Have a minimum of $1,000 of your own contributions in your TSP account.
- Not have repaid a TSP loan of the same type in the past 60 days.
- Be in “active pay” status because TSP loan repayments will be deducted from your paycheck.
- Not have had a taxable distribution on a loan within the past 12 months unless it is related to your separation from federal service.
- Only have one general purpose TSP loan and one residential TSP loan per account at any time.
- Not have a court order placed against your TSP account.
Should you 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 processing fee for every loan, which will be deducted from the loan amount.
- Most TSP loan borrowers will incur indirect costs in the form of sacrificed earnings because 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.
You’ll also want to ensure that you can afford to repay the monthly TSP loan payments. Use the Thrift Savings Plan loan payments calculator to find out how much you can expect to pay each month.
Disadvantages of a TSP loan
Although borrowing against your own savings is a low-risk way of securing funds, it’s not always ideal.
For example, unlike other borrowing options, like a traditional personal loan, TSP loans won’t help you build or improve your credit since payments aren’t reported to the credit bureaus. What’s more, TSP loan funds might be taxed as income twice — once for the loan and again after making a withdrawal in retirement.
You could also be taking on a significant risk if you leave your federal job with an outstanding loan. In this situation, you’ll either have to pay it back in one lump payment – including interest – within 90 days or otherwise face default, which will lead to the taxation of the outstanding loan balance.
Frequently asked questions
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.
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 eight to 13 days. Paper applications submitted by mail take up to several weeks to process.
What are the best alternatives to a TSP loan?
If a TSP loan doesn’t feel like the right path for you, consider alternatives, like putting an upcoming project or large expense on hold to build up your personal savings fund. If you have an urgent need for cash, a personal loan, home equity loan, or 0% APR credit card can be an alternative for unexpected expenses. When taking this path, make sure you can afford to keep up with the monthly payments.
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.