As long as we’re still working, we can borrow money from our Thrift Savings Plan account by means of a TSP loan. Most employer sponsored defined contribution plans allow for loans. We have the ability to take either (or both) a general purpose loan and a primary residence loan.
Loans from defined contribution plans are restricted in that they cannot be for more than $50,000, regardless of how much money you have in your account. Those with small balances (less than $100,000) are limited in the amount they can borrow to one-half of their account balance.
A general purpose loan is for any reason you want it to be for. It requires no documentation whatsoever and can be amortized over a period of up to five years.
A primary residence loan must be supported by documentation and can be amortized over a period of up to fifteen years. Documentation requirements are listed in the TSP’s publication on loans, which can be found at https://www.tsp.gov/forms/loans.html. And keep in mind that you can get a primary residence loan for an RV or a houseboat – as long as you will use them as your principal residence!
There are a couple of requirements that apply to both types of TSP loans. If you are covered under the FERS retirement system, your spouse’s consent is required for a loan, or any other withdrawal choice for that matter. A $50 application fee is required as well. The application fees are used to help defray TSP expenses. Also, you are not allowed to apply for another loan of the same type within 60 days of paying off a previous loan.
More on TSP Loans at ask.FEDweek.com
When you take a TSP loan, your TSP account will be reduced proportionately by the amount of the loan. For example, if you were evenly invested in the five basic funds and borrowed $50,000, the amount of $10,000 would be deducted from each fund. The interest rate you pay is based on the return of the G fund in the month in which your loan is approved, and is posted in the “loan and annuity rates” section of the TSP website (in June of 2018 it was 2.875%). The interest you pay goes back into your TSP account according to your most recent TSP contribution allocation. Both the loan and the repayments must be proportional between your Traditional and Roth TSP balances.
The Thrift Board discourages loans because, in many instances, borrowing from your retirement will result in less money being available for your retirement. This is based on the assumption that a large number of TSP participants have their investments in stock funds (i.e., C, S or I), where, in most years, the return is greater than that of the G fund. Of course there are exceptions to this rule – 2015 and 2008 come readily to mind.
If you leave federal service without repaying an outstanding loan, you will be given a choice of paying it back or taking a taxable distribution. Once the TSP receives notice of your separation from your agency (it often takes up to 30 days), you will be sent instructions on re-paying your loan. The notice will give you a date by which the loan must be paid back. If you do not re-pay the loan within that time period your loan will go into default and the outstanding balance of the loan is treated as a taxable distribution. The TSP will send you and the IRS a Form 1099 to that effect. You can avoid paying the tax if, within 60 days from the date of the 1099, you transfer an amount equal to the outstanding loan balance into an IRA (or other tax-deferred account). No disbursements can be made from your account until any outstanding loans have been closed. If you do not plan on re-paying your loan, you can contact the TSP and request an immediate determination of distribution.