FEDweek

Separation Has Consequences for TSP Loan

One Thrift Savings Plan consideration for those nearing retirement is the status of any loans they have taken from their TSP accounts. There’s a potential tax trap for those who have an outstanding loan when they retire.

Loans are repaid through payroll allotments over the payment period specified in the loan agreement. You can prepay the loan in part or in full before the end of your loan repayment schedule without penalty.

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 will be declared, potentially subjecting you to significant tax penalties. A delay in repaying a loan also may affect the processing of a withdrawal, if you intend to make a withdrawal election soon after retiring.

Those who find a need for a lump-sum of money later in their working careers might want to consider taking out an age-based in-service withdrawal rather than a loan, so long as they are at least age 59 ½. After that age, there is no early withdrawal tax penalty for taking out an in-service withdrawal. However, those who take out such a withdrawal will not be eligible for partial withdrawals post-separation.