Some of the increase in loans is due to the fact that participants may now have two general purpose loans outstanding at any given time. Image: Myvector/Shutterstock.com
By: John GrobeThere was a 25% increase in the number of Thrift Savings Plan Loans over the one-year period from September 2022 to September 2023. This wasn’t the only news on the TSP Loan Program that was announced at the November 2023 meeting of the Federal Thrift Retirement Investment Board. James Courtney, the Director of the Office of Participant Experience also said that August of 2023 showed the highest number of new TSP loans in more than three years.
Some of the increase in loans is due to the fact that participants may now have two general purpose loans outstanding at any given time. Up until around a year ago, participants could have two outstanding loans, but only one of them could be a general purpose loan. There are two types of loans, primary residence, and general purpose. With the recent change in rules, a participant could have both a general purpose and a primary residence loan, or they could have two general purpose loans.
Mr. Courtney did point out that the increase in the number of TSP loans is consistent with what has been happening in 401(k)s, suggesting that current economic conditions are to blame.
In its booklet on loans, the TSP discourages us from borrowing against our retirement. That’s good advice, but there are some times when borrowing is necessary and the interest rate on TSP loans is a reasonable rate that is based on the G Fund’s return. In January, the interest rate was 4.5% – pretty good compared to the rates you might pay elsewhere.
Here’s a few other items of interest about TSP loans.
Only employees can have TSP loans. Retirees are not allowed to apply for a TSP loan.
TSP loans are taken proportionately from your account based on its allocation. For example, if you were equally invested in the five basic funds (C, S, I, F and G) and borrowed $50,000, an amount of $10,000 would come from each fund.
Unless you specify otherwise, your loan will be taken proportionately from your traditional and Roth balances.
$50,000 is the maximum amount that can be outstanding in loans at any time. This is an IRS rule and applies to all 401(k) type plans. If your account balance is less than $100,000, the limit that can be borrowed is ½ of your account balance.
You need your spouse’s signed, notarized consent for a TSP loan.
A court order will bar you from taking a loan.
As you repay your loan, your payments are invested in the TSP based on your most recent contribution allocation.
If you leave federal service with an outstanding loan, you may:
· Repay the loan in full;
· Set up installment payments based on the original length of the loan; or
· Have the TSP declare the loan to be a taxable distribution.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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