Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees and members of the uniformed services. If you fall into this category and need to borrow money, you may be familiar with a TSP loan that lets you borrow against your retirement savings. There’s a lot to like about TSP loans, but there are also some big downsides you should know about.
TSP loans are especially well-suited if you’re absolutely certain you’ll remain a federal employee until you pay off your loan. There are a lot of other considerations too, and we’ll walk you through them to help you understand if TSP loans are right for you.
What Is a TSP Loan?
A TSP loan is similar to a 401(k) loan—which lets you draw money against your retirement account—but designed specifically for federal employees. However, there are multiple types of TSP loans, including:
- Residential TSP loans. You can use these to help pay for building or buying your primary residence. TSP states this can include homes, condos and even RVs or boats. You aren’t able to use residential TSP loans for refinancing, remodels or buying land by itself, although you could use a general TSP loan for these things. Term lengths range from one to 15 years.
- General TSP loans. These are much like personal loans, and you can use them for just about anything. Term lengths range from one to five years.
How a TSP Loan Works
TSP loans let you borrow some of the money you have in your TSP account. In this case, you essentially act as your own lender, and you make payments back—with interest (currently 1.125%) that fluctuates depending on the average yield of all U.S. Treasury securities with at least 4 years to maturity—to your own account.
Your TSP plan administrator handles all of the back-end work for you, such as sending out the loan funds and putting them back in your account as you pay it back over time. It’s important to keep in mind, though, that the interest rate you’ll pay yourself is likely less than what you could earn elsewhere, like in the stock market or another interest-bearing account.
Loan Limits
The minimum amount you can borrow with a TSP loan is $1,000. The maximum amount you can borrow is limited by the following rules:
- You can’t borrow more than you’ve contributed to the account, plus earnings.
- You can’t borrow more than 50% of your vested account balance or $10,000, whichever is more
- You can’t borrow more than $50,000 minus the amount of any TSP loans you’ve taken out in the past year
Given that the median home price in the U.S. is $355,900, a TSP loan will hardly buy you a decent home in most areas. However, you can still use your loan to cover closing costs or even your down payment, which can allow you to buy more home than you might otherwise be able to do.
Interest Rates
When you take out a TSP loan, you’re essentially acting as your own lender. That means you’re borrowing from the money you’ve already saved (in your TSP), and you pay it back to yourself—with interest (currently 1.125%). That’s a major difference between TSP loans and other loan types: normally, the lender pockets the interest, but in this case, you pay the interest to yourself. This means you should end up with more in the account than what you initially took out.
Although the interest you pay goes back into your account, it’s still less than what you could earn by investing your money in another fund. So while your money may grow compared to the initial amount, it will grow at a slower rate than it would have in a different interest-bearing account or the stock market.
Repayment Terms
You’ll repay the loan slowly over time through a payroll deduction, where the money is taken out of your paycheck automatically. That money will go back into your TSP. You’re allowed to have both types of TSP loans out at one time (a residential and general TSP loan), but you can’t have more than one of each type at the same time.
Here’s one of the big kickers, though: if you leave federal service and you’re still repaying your TSP loan, you’ll need to pay the entire outstanding balance back within 90 days. If you can’t—and let’s be honest, that could be a huge amount of money—the IRS will treat it as an early withdrawal, and if you’re under age 59 ½, you could owe income taxes and a 10% early withdrawal penalty on the outstanding balance. 401(k)s are structured the same way.
After a taxable distribution is declared, you can roll over that amount into an IRA or a workplace retirement savings plan at your new gig, if available, within 60 days to avoid taxes and penalties.
When Should You Use a TSP Loan?
TSP loans aren’t for everyone, but here are some clues that might mean they’re OK for you:
- Your federal job is stable. TSP loans are best if you have job security. If you’re a term employee, for example, and your job is up for renewal every year with a not-to-exceed-by date, choosing a TSP loan could be a risky option. If you leave service before you repay the loan, you’ll have to pay it all back in one fell swoop.
- You don’t have the best credit. TSP loans don’t rely on credit. As long as you meet the other requirements we list in the following section, you can generally get a loan.
- You’re looking for ultra-cheap rates. TSP loans charge the same interest rate as the G Fund, one of the options available in the TSP itself. That rate is currently 1.125%. You’d be hard-pressed to find a rate that good elsewhere, especially if you don’t have the best credit.
How to Get a TSP Loan
Getting a TSP loan is relatively easy compared to some other loan types. Here’s a step-by-step of how the process works.
1. Check That You’re Eligible
First, you’ll need to meet the following requirements:
- Have at least $1,000 saved in your TSP account
- Must not have any court orders against you
- Must be in “active-pay” status
- At least 60 days must have passed from when you paid off your previous TSP loan (if any)
- Must be a current federal employee (you can’t take a TSP loan after you leave federal service)
- At least 12 months must have passed from when you last took a taxable distribution from your TSP
2. Complete the Application
Log in to your TSP account to apply for a loan. You’ll find an online tool that will walk you through the application process.
The tool will ask you for a few pieces of information. If you’re married, for example, you may need a signed consent form from your spouse. You’ll also need a few extra documents if you’re taking out a residential TSP loan. For instance, you’ll need to provide documentation with the address of the home you’re buying or building from a third party.
Depending on how the application tool guides you through the process, you may be able to complete the loan entirely online, or it might require you to print out forms and send them in.
3. Get Your Money
If you’re able to do the entire application online, you can expect your money within eight to 13 business days. If you need to send in paper forms, it can take several weeks.
Either way, if you receive an approval, you’ll receive the money as a check in the mail. You can’t opt for electronic payment, unfortunately. There is a $50 administrative fee that will be deducted from your loan proceeds, so the check you get will be $50 short of the total amount you requested.
Pros of TSP Loans
- No credit check: Credit scores aren’t factored into lending decisions, meaning it’s an especially good option for people who aren’t able to qualify for other loans because of their credit.
- Low interest rates: TSP loan rates are among the lowest you’ll pay for any type of loan.
- Self-lending: You’re borrowing and paying interest to yourself, rather than a lender, so you also keep all the interest you pay.
- Easy payments: Payments are taken out of your loan automatically through payroll deduction.
- Non-pay status perks: If you’re put into non-pay status, such as if you’re furloughed or on leave without pay, you can notify your TSP administrator and you won’t have to make any payments until you start working again.
Cons of TSP Loans
- Doesn’t build credit: TSP loans don’t require a credit check, but they also won’t build credit either because your payments aren’t reported to the credit bureaus.
- Potential for a big payment surprise: If you leave federal service before you pay your loan off, you’ll have to repay the entire balance in full even if it wasn’t your fault that you had to leave. If you don’t, you’ll have to pay extra taxes and stiff penalties.
- Missed opportunity cost: The interest rate you’ll pay yourself is likely less than what you could earn if you left it in another fund. This means your money will grow at a slower rate.
FAQs
Who gets the interest from a TSP loan? ›
Before taking a TSP loan, you should consider the effects it will have on your retirement savings. It's true that you'll be paying the loan back to yourself with interest, but by temporarily taking money out of your account, you'll be missing out on the compound earnings that money could otherwise have accrued.
What is TSP benefits for federal employees? ›The TSP is a retirement savings and investment plan for federal employees. The purpose of the TSP is to provide retirement income through savings and tax deferred benefits that many private corporations offer their employees. The TSP is similar to private sector 401(k) plans.
Is it better to take a TSP loan or withdrawal? ›A TSP loan is often the better option because you won't owe taxes or a penalty and you will get the money back into your account once you pay it back.
How does TSP loan work? ›What Are Thrift Savings Plan Loans? A TSP loan allows federal workers to borrow from their retirement savings. They must pay interest on the loan; however, that interest is paid back into their own retirement account. In 2022, interest rates were 3%, typically lower than the rate private employees pay on 401(k) loans.
Does TSP loan count as income? ›The IRS treats the amount of the declared taxed loan as taxable income . In addition, if you are under age 59 ½, you may have to pay a 10 % early withdrawal penalty tax . You may not roll over a loan that gets taxed while you're still in service .
Does a TSP loan count against your credit? ›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.
When can a federal employee withdraw from TSP without penalty? ›Age-59 ½ in-service withdrawals are withdrawals that you can make from your TSP account when you're age 59½ or older. We determine your age based on the date of birth reported by your employing agency or service.
How much does TSP match for federal employees? ›Here's how we calculate the 5% match. of your basic pay each pay period. dollar-for-dollar. matches 50¢ on the dollar.
Can I cash out my TSP when I leave federal service? ›You can make a one-time-only withdrawal of part of your TSP account and leave the rest in the TSP until a later date. You cannot make a partial withdrawal of less than $1,000.
What is the disadvantage of a TSP loan? ›Possibly one of the worst disadvantages of getting a TSP loan is if you leave your federal service job before paying off the loan in full, you have only 90 days to repay the loan if you cannot do so or fail to meet the deadline the entire loan is reported to the IRS as income.
Can a TSP loan be denied? ›
keeper, together with any documentation required to be submitted, the loan will be initially approved or denied by the TSP record keeper based upon the requirements of this part, including the following conditions: (1) The participant has signed the promise to repay the loan.
How is a TSP loan paid back? ›Low interest rates: TSP loan rates are among the lowest you'll pay for any type of loan. Self-lending: You're borrowing and paying interest to yourself, rather than a lender, so you also keep all the interest you pay. Easy payments: Payments are taken out of your loan automatically through payroll deduction.
What are the 2 types of TSP loans? ›There are two types of TSP loans: general purpose loans and primary residence loans. A general purpose loan can be used for any purpose, including buying or building a house. And you don't have to provide any supporting documentation when you apply.
What is the maximum loan amount for TSP? ›On top of paying interest, you'll pay a $50 administrative fee to take out a TSP loan. The minimum amount you can borrow is $1,000. The maximum depends on factors like how much you have in your TSP account and whether you already have another TSP loan. In some cases, the maximum can be as high as $50,000.
How many times can you take out a TSP loan? ›You can have two outstanding TSP loans, but only one primary residence loan, per account. That means you can have two general purpose loans for each account, or one general purpose loan and one primary residence loan.
Are TSP loans taxed twice? ›Double taxation: When repaying a TSP loan, you pay that interest back to yourself; however, you'll do it with after-tax dollars. Then, when you make a withdrawal in retirement, you'll have to pay taxes yet again on the same funds.
What is the tax penalty for TSP loan? ›The taxable portion of your withdrawal is subject to federal income tax at your ordinary rate. Also, you may have to pay state income tax. An additional IRS early withdrawal penalty of 10% may apply if you're under the age of 59½.
How much is a TSP loan taxed? ›As long as your loan is repaid before you separate from federal service, you will pay no taxes on it. If you were to separate from federal service without repaying your loan, the remaining outstanding amount of the loan would be considered a taxable distribution and you would owe taxes on it.
Can I use my TSP to pay off my mortgage? ›By using a TSP to pay off a mortgage, you will lose the mortgage-interest deduction that reduces your AGI, or adjusted gross income. Further, because tax-deferred assets are being used to pay off the mortgage, the tax consequences are compounded¹.
Should I use TSP loan to pay off mortgage? ›Given the taxes and potential penalties associated with most TSP withdrawals and the opportunity cost of taking a loan, it generally doesn't make sense to look to the TSP to pay off your mortgage.
What is the average TSP balance by age? ›
| Age | Average Contribution Rate | Average Balance |
|---|---|---|
| 30-39 | 8% | $38,400 |
| 40-49 | 8% | $93,400 |
| 50-59 | 10% | $160,000 |
| 60-69 | 11% | $182,100 |
Age-591/2 Withdrawals
If you are 591/2 or older, you can make withdrawals from your TSP account while you are still employed . You must pay income tax on the taxable portion of your withdrawal unless you roll it over to an IRA or other eligible employer plan .
President signs SECURE 2.0 Act — On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 into law. SECURE 2.0 increases the start age for required minimum distributions from 72 to 73 in 2023 and then further increases the start age to 75 in 2033.
How do I maximize my federal TSP? ›Your catch-up contributions will be in addition to the 2023 TSP regular contribution limit, which means employees can contribute up to $30,000 in 2023. To maximize the catch-up contribution amount of $7,500 for 2023, employees will need to contribute an additional $288 per pay period ($7,500/26 = $288.46).
How do I double my TSP? ›The rule of 72 is a great way to estimate how long it will take for your TSP to double. This rule says that if you divide 72 by your average investment return then you'll get how many years it takes to double. For example, if on average you earn 10%/year then your money will take 7.2 years to double (72/10= 7.2).
What is the average TSP balance for 2022? ›Average TSP account balances for FERS participants reached $21,302.00, while average balances for CSRS participants reached $29,075.00 as of October 2022.
Do you lose your TSP if you get fired? ›The short answer is no. Unfortunately, the misconception that you can lose your federal retirement if fired persists even among federal employees. Many employees incorrectly believe that they will lose their federal retirement benefits if the agency fires them.
What not to do with your TSP? ›Taking a loan from your TSP is a bad idea. The money you're putting into your TSP is for retirement, not for buying a new car. If you leave federal employment with an outstanding TSP loan you have to pay back the full loan balance (opens in new tab) within 90 days.
Should I keep money in TSP after separation? ›Consider leaving your funds in the TSP unless you don't want to deal with extra paper work or you want more investment options. Otherwise, consider rolling your TSP account assets into your new 401(k) plan if you have one, or one of the other following options.
How long is the waiting period for TSP loan? ›The minimum amount you can borrow is $1,000. There is a 60-day waiting period after a loan (of the same type) is paid off before you can apply again.
Does your TSP earn interest? ›
It gives you the opportunity to earn rates of interest similar to those of long-term government securities with no risk of loss of principal.
Does the TSP compound interest? ›This option is incredibly convenient. Consider some of the benefits of contributing early in one's career to the TSP: Compound earnings, or interest generated on reinvested earnings, over the course of time is the primary contributor to powerful gains.
What happens to TSP loan when I retire? ›If you leave service with an outstanding TSP loan, you must repay the loan in full, including interest. If you have not made that payment within 90 days, a “taxable distribution” of the unpaid loan amount that would be taxable on withdrawal will be declared, potentially subjecting you to significant tax penalties.
Should you pay off TSP loan before retirement? ›If you aren't able to pay your loan down early, don't worry: you can still retire with an outstanding TSP loan. No one will force you to continue working until it's paid off.
Which TSP fund has the best return? ›For more conservative investors, note that the G Fund (often considered the safest TSP Fund) had a return of 1.38% for the year. The L Income Fund, which also includes some stock investments, had a much better return than the G Fund. The L Income return in 2021 was 5.42%.
What is the max TSP loan? ›Loan Limits
The minimum amount you can borrow with a TSP loan is $1,000. The maximum amount you can borrow is limited by the following rules: You can't borrow more than you've contributed to the account, plus earnings. You can't borrow more than 50% of your vested account balance or $10,000, whichever is more.
You may not take out a new loan for 60 days after paying off a loan. There are two types of allowable withdrawals while in service—age-based and financial hardship.
Can I pay extra on my TSP loan? ›You can make additional payments or prepay your TSP loan at any time by making a check payable to the TSP and submitting it along with a loan payment coupon (TSP-26). You can get the payoff amount via either the TSP website or the ThriftLine.