Updated 2022
As you know, loans can be complicated. We are going to break down the most important information to know about TSP loans to help you answer the question: Should I take out a TSP loan? Let’s get started.
If you are in the military, make sure to read the sections marked with a ✰ to learn more about how the military affects your TSP differently.
You can take a loan from your TSP as long as you meet the following criteria:
There are two different types of TSP loans available to you:
You can have up to two loans out at a time, but only one primary residence loan at a time. This means that you could have two general purpose loans out or one general purpose loan and one primary residence loan. You cannot have two primary residence loans out at any given time.
✰ If you have a civilian account and a uniformed services account these restrictions apply to each account separately, meaning that you can have up to four loans out at any one time (2 per account).
When you take out a loan, the money comes directly from your TSP account. The source of your loan will mirror that of your contributions. If you have both Traditional and Roth contributions, your loan will be pulled proportionately from both. Similarly, if you have invested in more than one fund, your loan is deducted from each fund proportionately.
For example: If 70% of your account is in your traditional balance and 30% is in your Roth balance, and you take a TSP loan, then 70% of the amount you borrow will be taken from your traditional balance and 30% will be taken from your Roth balance. The same applies to your fund investments.
Remember, money invested in TSP mutual funds are not available for borrowing and are therefore unaffected by TSP loans.
✰ If you have tax-exempt contributions, your loan will be taken proportionately from tax-exempt and taxable contributions.
The minimum amount that you can borrow is $1,000.
There is a total maximum amount that you can borrow based on your account balance, there is not a per-loan maximum. Meaning if you have two loans (four max if you have both a civilian and a uniformed services account) together they cannot exceed the maximum amount.
As per tsp.gov, the maximum amount that you can borrow is the smallest amount of the 3 “tests” below. Read through the following tests and calculate. The smallest amount of the three is the maximum amount you can borrow. Remember, the maximum amount is for all your loans combined.
To apply for a loan log into your account or use one of the ThriftLine Service Center options (call, fax, or mail).
There is an application fee for each loan you take out. For general purpose loans the fee is $50, for primary residence loans the fee is $100. Application fees are deducted proportionately from Roth and Traditional balances included in your loan amount.
The interest rate you will pay is the rate at the time your loan is processed. As per tsp.gov, it will be the same at the G fund’s rate of return from the prior month. Or you find it at the bottom of this page https://www.tsp.gov/loan-basics/ in bold.
You can check the status of your loan through your TSP account. Once your loan has been processed the money will generally be available within 3 business days.
There are a couple important things you need to know about repaying your loan. As per tsp.gov, please be aware of the following:
When repaying your loan, you have 60 months to repay a general purpose loan and 180 months to repay a primary residence loan back in full. Failing to pay back your loan by the term limit will result in your unpaid balance becoming taxable income. More details about this can be found in the section “Loan delinquency” below.
As per tsp.gov, the entire unpaid balance of your loan will be declared as a taxed loan in either of the following situations:
Unfortunately, if you find yourself in either of the above situations, the IRS will treat the amount of your unpaid loan as taxable income. If you are under the age of 59 and ½ you will additionally be subject to the 10% early withdrawal penalty tax. Be aware that a taxed loan permanently affects your TSP balance unless it is repaid and will affect your eligibility for another loan.
If any part of your taxed loan is associated with Roth or tax-exempt contributions, those contributions will not be subject to tax. However, any earnings of these contributions will be taxed even if you meet the two conditions necessary to qualify for tax-free Roth earnings (see our Roth vs. Traditional contribution resource article).
Even if your loan becomes taxable, you may continue to repay it as long as you remain a federal employee. Once you separate from federal service your taxable loan will no longer be repayable.
When you take a TSP loan, you borrow from your account. Although you will repay the money plus interest to your account, remember that the interest you pay may be less than the earnings that may have accrued if you had kept the money in your TSP account.
As you can see, TSP loans are complicated. It is important to read the fine print before you take out a loan so you are aware of all the potential consequences.
The majority of this information is from tsp.gov and has been condensed for your easy reading. If you would like to read more about TSP loans, click the following link: https://www.tsp.gov/publications/tspbk04.pdf.
DISCLAIMER: The information provided in this article is for general information purposes and has been obtained from sources considered reliable. The information may not cover all aspects of unique circumstances or federal regulations. The information is offered with the understanding that the publisher and author are not engaged in rendering legal, accounting, or other professional services. Neither the publisher nor the author of this article should be held responsible for any loss or damages incurred. TSP Pilot is not affiliated with the federal government.
