A Thrift Savings Plan (TSP) is a retirement plan offered to uniformed service members or employees of the federal government. A TSP loan or Thrift Savings Plan loan allows members of a TSP retirement plan to borrow against their own retirement savings and is very similar to a 401k loan.
For eligible borrowers who need extra cash to finance a large or unexpected expense, a TSP loan can be a logical solution. TSP loans do come with rules and potential costs, so be aware of these before choosing this option.
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 the money repaid goes back into your retirement account.
There are two types of TSP loans:
- General purpose: Can be used for any purpose, do not require documentation and have a repayment term of 1 to 5 years.
- Residential loans: Used only toward the purchase or construction of a primary residence. They require documentation and have a repayment term of 1 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.
TSP loan borrowing limits
How much can you borrow from a Thrift Savings Plan?
The maximum you can borrow for a TSP loan is $50,000 and the minimum is $1,000. You can only have one outstanding general purpose loan and one outstanding residential loan from a TSP account at a time.
Does a TSP loan affect your credit?
The quick and easy answer is: it doesn’t. This type of loan, like a 401k 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 a seven to 10 days. Paper applications submitted by mail take up to several weeks to process.
TSP loan considerations
It’s important to understand the other costs and rules associated with TSP loans. Even though you are borrowing from yourself, make sure you understand these underlying costs:
- There is a $50 processing fee per loan which will be deducted from the loan amount.
- Most borrowers of TSP loans will incur indirect costs in the form of sacrificed earnings. 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. That 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.
With all of these things considered and after comparing the TSP loan to other loan options like personal loans, the TSP loan is still usually a more financially beneficial option.
The bottom line
If you are a uniformed service member or a federal employee TSP loans are funds borrowed from your own TSP retirement account. They 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, we recommend this as a preferred loan option due to the repayment to yourself of borrowed funds and interest charges as well as the lack of credit reporting required.