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 that would be taxable on withdrawal 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.
Until last fall, there had been several downsides to taking age-based withdrawals—only one was allowed lifetime and those who took one could not take partial withdrawals after they retired but instead had to make a decision affecting the entire account. Those considerations no longer apply, though. Now, up to four in-service age-based withdrawals are allowed per year and there is no limit to the number of partial withdrawals after retirement.