Lindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Lindsay VanSomeren ContributorLindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Written By Lindsay VanSomeren ContributorLindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Lindsay VanSomeren ContributorLindsay VanSomeren is a personal finance writer based out of Kirkland, Washington. Her work has appeared on Business Insider, Credit Karma, LendingTree, and more.
Contributor Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Written By Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Lead Editor, Mortgages & LoansUpdated: Feb 25, 2021, 4:00am
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The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees and members of the uniformed services. If you fall into this category and need to borrow money, you may be familiar with a TSP loan that lets you borrow against your retirement savings. There’s a lot to like about TSP loans, but there are also some big downsides you should know about.
TSP loans are especially well-suited if you’re absolutely certain you’ll remain a federal employee until you pay off your loan. There are a lot of other considerations too, and we’ll walk you through them to help you understand if TSP loans are right for you.
A TSP loan is similar to a 401(k) loan—which lets you draw money against your retirement account—but designed specifically for federal employees. However, there are multiple types of TSP loans, including:
TSP loans let you borrow some of the money you have in your TSP account. In this case, you essentially act as your own lender, and you make payments back—with interest (currently 1.125%) that fluctuates depending on the average yield of all U.S. Treasury securities with at least 4 years to maturity—to your own account.
Your TSP plan administrator handles all of the back-end work for you, such as sending out the loan funds and putting them back in your account as you pay it back over time. It’s important to keep in mind, though, that the interest rate you’ll pay yourself is likely less than what you could earn elsewhere, like in the stock market or another interest-bearing account.
The minimum amount you can borrow with a TSP loan is $1,000. The maximum amount you can borrow is limited by the following rules:
Given that the median home price in the U.S. is $355,900, a TSP loan will hardly buy you a decent home in most areas. However, you can still use your loan to cover closing costs or even your down payment, which can allow you to buy more home than you might otherwise be able to do.
When you take out a TSP loan, you’re essentially acting as your own lender. That means you’re borrowing from the money you’ve already saved (in your TSP), and you pay it back to yourself—with interest (currently 1.125%). That’s a major difference between TSP loans and other loan types: normally, the lender pockets the interest, but in this case, you pay the interest to yourself. This means you should end up with more in the account than what you initially took out.
Although the interest you pay goes back into your account, it’s still less than what you could earn by investing your money in another fund. So while your money may grow compared to the initial amount, it will grow at a slower rate than it would have in a different interest-bearing account or the stock market.
You’ll repay the loan slowly over time through a payroll deduction, where the money is taken out of your paycheck automatically. That money will go back into your TSP. You’re allowed to have both types of TSP loans out at one time (a residential and general TSP loan), but you can’t have more than one of each type at the same time.
Here’s one of the big kickers, though: if you leave federal service and you’re still repaying your TSP loan, you’ll need to pay the entire outstanding balance back within 90 days. If you can’t—and let’s be honest, that could be a huge amount of money—the IRS will treat it as an early withdrawal, and if you’re under age 59 ½, you could owe income taxes and a 10% early withdrawal penalty on the outstanding balance. 401(k)s are structured the same way.
After a taxable distribution is declared, you can roll over that amount into an IRA or a workplace retirement savings plan at your new gig, if available, within 60 days to avoid taxes and penalties.
When Should You Use a TSP Loan?
TSP loans aren’t for everyone, but here are some clues that might mean they’re OK for you:
Getting a TSP loan is relatively easy compared to some other loan types. Here’s a step-by-step of how the process works.
First, you’ll need to meet the following requirements:
Log in to your TSP account to apply for a loan. You’ll find an online tool that will walk you through the application process.
The tool will ask you for a few pieces of information. If you’re married, for example, you may need a signed consent form from your spouse. You’ll also need a few extra documents if you’re taking out a residential TSP loan. For instance, you’ll need to provide documentation with the address of the home you’re buying or building from a third party.
Depending on how the application tool guides you through the process, you may be able to complete the loan entirely online, or it might require you to print out forms and send them in.
If you’re able to do the entire application online, you can expect your money within eight to 13 business days. If you need to send in paper forms, it can take several weeks.
Either way, if you receive an approval, you’ll receive the money as a check in the mail. You can’t opt for electronic payment, unfortunately. There is a $50 administrative fee that will be deducted from your loan proceeds, so the check you get will be $50 short of the total amount you requested.
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