How does a TSP loan work? (2024)

FAQs

Is it good to take out a TSP loan? ›

A TSP loan is often the better option because you won't owe taxes or a penalty and you will get the money back into your account once you pay it back. But remember, the true cost of a TSP loan is not the $50 loan fee.

TSP loan basics

You repay the loan with interest in regular payments—through payroll deduction if you're still in federal service, or by direct debit, check, or money order if you've left federal service.

On top of paying interest, you'll pay a $50 administrative fee to take out a TSP loan. The minimum amount you can borrow is $1,000. The maximum depends on factors like how much you have in your TSP account and whether you already have another TSP loan. In some cases, the maximum can be as high as $50,000.

There are two types of loans: General purpose loan with a repayment period of 12 to 60 months . There is no documentation required and no need to state the purpose of the loan . Primary residence loan with a repayment period of 61 to 180 months .

Does a TSP loan affect your credit? A TSP loan, like a 401(k) loan, does not appear on your credit report for the simple reason that it is your own money you're “borrowing,” so the only person you owe it back to is yourself.

Can a TSP loan be denied? Yes, a TSP loan can be denied if you do not meet the eligibility requirements. You must be a federal employee or member of the uniformed services to apply. Also, you must have a TSP account balance of at least $1, 000, and be a current federal employee.

You can make additional payments or prepay your TSP loan at any time by making a check payable to the TSP and submitting it along with a loan payment coupon (TSP-26). You can get the payoff amount via either the TSP website or the ThriftLine.

As long as your loan is repaid before you separate from federal service, you will pay no taxes on it. If you were to separate from federal service without repaying your loan, the remaining outstanding amount of the loan would be considered a taxable distribution and you would owe taxes on it.

If you do not have enough gross pay for your agency to make a deduction for your TSP loan payments, you must submit loan payments from your personal funds directly to the TSP. Failure to make payments could result in your loan being declared a taxed loan.

Heading Into Retirement With a TSP Loan

You can pay a little extra each month, use your tax refunds to give yourself a boost, or pay the balance in one lump sum if you can afford it.

Can I take a hardship withdrawal from my TSP? ›

To qualify for a financial hardship withdrawal, you must have a financial need for at least one of the following reasons: Recurring negative monthly cash flow. Medical expenses (including household improvements needed for medical care) that you have not yet paid and that are not covered by insurance.

Unlike a loan, a financial hardship withdrawal will permanently deplete your TSP account. You will not be able to make extra contributions to catch up to the withdrawal amount, leaving you with less funds when you retire.

The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4 percent of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.

Taking a loan from your TSP is a bad idea. The money you're putting into your TSP is for retirement, not for buying a new car. If you leave federal employment with an outstanding TSP loan you have to pay back the full loan balance within 90 days.

You can withdraw your entire TSP account balance in a single payment. A series of monthly payments. You can withdraw your entire account in a series of substantially equal monthly payments.

If the TSP record keeper receives a payment that repays the outstanding loan amount and overpays the loan by $10.00 or more, the overpayment will be refunded to the participant.

Unlike investment accounts, TSP withdrawals don't get the advantage of being taxed at the lower long-term capital gains rates. TSP withdrawals are always taxed at your ordinary income tax rate. However, whenever you take money out of the Roth TSP then that money comes out completely tax free.

If you make $8,000 a year living in the region of California, USA, you will be taxed $700. That means that your net pay will be $7,300 per year, or $608 per month. Your average tax rate is 8.8% and your marginal tax rate is 8.8%.

By using a TSP to pay off a mortgage, you will lose the mortgage-interest deduction that reduces your AGI, or adjusted gross income. Further, because tax-deferred assets are being used to pay off the mortgage, the tax consequences are compounded¹.

You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship.

How long does it take for TSP to approve a hardship withdrawal? ›

You can log into My Account or call the ThriftLine to find out the status of your withdrawal request. You will be notified when the funds have been disbursed. You should expect it to take up to 10 days from the time the TSP receives your request until the time you receive the check.

The taxable portion of your withdrawal is subject to federal income tax at your ordinary rate. Also, you may have to pay state income tax. An additional IRS early withdrawal penalty of 10% may apply if you're under the age of 59½.

By this measure, the I Fund is the riskiest, with a maximum drawdown of -60.89%, which occurred during the 2008-2009 global financial crisis.

The thought has crossed your mind that you could use some of what you've saved in your TSP to pay off your mortgage, but should you? Usually, the answer is no. The biggest reason not to use your TSP is typically taxes.

You can request to receive a total distribution of your entire TSP account balance if you want to take all of your money out of the TSP. Once processed, your TSP account balance will be $0, and you'll no longer be able to move money into the TSP from eligible plans.

In-service withdrawals are withdrawals you make from your TSP account while you're still working for the federal government or a member of the uniformed services. An in-service withdrawal can have a serious impact on your TSP account.