The Thrift Savings Plan, like most employer sponsored defined contribution plans, allows participants to take loans while still working. The following fourteen items are important to know.
1. You must have at least $1,000 of your own contributions in the TSP before you can take a loan.
2. If you have repaid a loan within the last 60 days, or if you have received a taxable distribution of a loan within the last 12 months, you cannot initiate a new loan.
3. The normal maximum loan amount is $50,000 or 50% of the account balance, whichever is less. This limit is set by the IRS, not the TSP.
4. During the current coronavirus emergency, the limit that a “qualified participant” can borrow has been raised to $100,000 or 100% of the account balance, whichever is less. The new limit applies for loans taken within 180 days of March 27, 2020.
5. A qualified participant for the purpose of the above is an employee participant who has been diagnosed with, or who has a spouse or dependent who has been diagnosed with COVID-19 by a CDC approved test; or any employee participant who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having reduced hours as a result of the COVID-19 emergency, or who is unable to work due to lack of child care due to the disease.
6. Be aware that as of mid-May, the Thrift Board has not provided any guidance to participants on the CARES Act changes to loans. Check https://www.tsp.gov/whatsnew/Content/coronavirus/index.html#caresAct to see if anything has changed. As of the time this article was written, the TSP stated that the CSRES Act changes would be implemented no later than June 22, 2020.
7. A primary residence loan can be used only for the purchase of a primary residence and can be amortized over a period of no more than 15 years.
8. A general purpose loan can be used for any purpose whatsoever and can be amortized over a period of no more than 5 years.
9. Your TSP account will be reduced proportionally by the amount of the loan based on the current account balances. For example, if you were equally invested in the 5 basic funds (C, F, C, S and I) and borrowed $50,000, the amount of $10,000 would be deducted from each fund.
10. Loans are taken proportionally from your traditional and Roth TSP balances.
11. Loan payments are invested based on your current contribution allocation. For example, if loan payments were $500 per pay period and your current contribution allocation was 50% G and 50% C, $250 would be put in each of the two funds.
12. The interest rate charged is based on the return of the G Fund at the time the loan is approved. In May 2020, the rate is 0.75%.
13. If you separate from federal service with an outstanding loan, you must either repay it or take a taxable distribution of the outstanding balance. You will be contacted by the TSP with their options shortly after your separation.
14. The TSP will not allow a post-separation withdrawal if there is an outstanding loan.