Taking a Loan from Your TSP

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Like most other defined contribution plans, the Thrift Savings Plan allows participants to take loans from their account while still employed.  As long as we’re still working, we can take either (or both) a general purpose loan and a primary residence loan.

A general purpose loan can be had for the asking.  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.  You can find the documentation requirements in the TSP’s publication on loans, which can be found at https://www.tsp.gov/forms/loans.html.

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.

Regardless of the size of your TSP balance, your total loan balance cannot exceed $50,000; this is a legal requirement that applies to all defined contribution plans like the TSP.  If you have a small balance (less than $100,000), your allowable loan will be limited to one-half of your account balance.

You are not allowed to apply for another loan of the same type within 60 days of paying off a previous loan.  This prohibition was introduced ten or so years ago, as there was a small group of TSP participants who were continuously taking general purpose loans.

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.  The interest you pay goes back into your TSP account, so you are, in effect, paying yourself for the use of your money.  Repayments go back into your TSP according to your most recent 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.