What is a Thrift Savings Plan (TSP) loan?

A Thrift Savings Plan (TSP) is a retirement plan offered to uniformed service members or employees of the federal government. A TSP loan allows members of a TSP retirement plan to borrow against their own retirement savings, similar to a 401(k) loan.

A TSP loan can be a logical solution for eligible borrowers who need extra cash to finance a large or unexpected expense. However, there are TSP loan rules and potential costs involved that you will want to consider before taking one out.

What is a Thrift Savings Plan loan?

A TSP loan is a type of loan that allows federal employees or uniformed service members to borrow from their Thrift Savings Plan. Because you’re borrowing from your savings, qualifying for a TSP loan is typically easy. However, you may have to submit additional paperwork if you use your loan funds for expenses related to a residence.

TSP loans let you borrow a minimum of $1,000, but the maximum you can borrow is based on a few factors. For example, you can’t borrow over 50 percent of your vested account balance or $10,000, whichever is more, and you can’t take out over $50,000 minus any TSP loans taken out in the past year.

Depending on the loan’s use, you’ll either have a maximum of five or 15 years to repay the funds with a fixed interest rate. Payments can be automatically withdrawn from your paycheck.

There are two types of TSP loans:

• General purpose: These loans can be used for any purpose, do not require documentation and have a repayment term of one to five years. They come with a $50 processing fee.
• Primary residence: These loans can only be used toward the purchase or construction of a primary residence. Additional paperwork or documentation may be required, and they will have a repayment term of up to 15 years. There is a $100 processing fee.

How do TSP loans work?

With a TSP loan, you are essentially borrowing your own money. The TSP loan rate charged will be equivalent to the G Fund rate, the Government Securities Investment Fund, the month before you requested the loan.

If you complete your application for a TSP loan online and are approved, you’ll generally get the money within three business days. Paper applications submitted by mail may take several weeks to process.

How much can you borrow from your Thrift Savings Plan?

The minimum you can borrow for a TSP loan is $1,000. The maximum is the lesser of:

• The amount currently in your TSP minus outstanding loans
• Half of your vested account balance or $10,000
• $50,000, minus outstanding loan balances from the last 12 months

How to get a TSP loan

You can apply for a TSP loan online by logging into your account on the TSP website. You might be able to complete the entire loan application process online. However, you may have to submit supporting documentation. You can also use ThriftLine Service options, like phone, fax or mail.

If you’re a Federal Employees Retirement System participant or a uniformed service member and are married, your spouse must sign the Loan Agreement to signify their consent. Similarly, your spouse will be notified if you are applying for a TSP loan as a Civil Service Retirement System participant. In rare circumstances, there have been exceptions to TSP loan rules regarding spousal consent.

TSP loan eligibility requirements

You must be a uniformed service member or a federal employee for both TSP loan types. Additionally, you must:

• Have a minimum of $1,000 of your own contributions in your TSP account
• Not have repaid a TSP loan of any type in the past 30 business days
• Be in “active pay” status because TSP loan repayments will be deducted from your paycheck
• Not have had a taxable distribution on a loan within the past 12 months unless it is related to your separation from federal service
• Only have one general purpose TSP loan and one residential TSP loan per account at any time
• Not have a court order placed against your TSP account

Should you get a TSP loan?

Compared with other types of loans, TSP loans are fairly low risk — interest rates are low, and you’re borrowing from yourself rather than a lender. A TSP loan is a good solution if you need to borrow money for a purchase that you can’t afford out of pocket.

Every loan has a processing fee, which will be deducted from the loan amount. There are indirect costs as well because any money you borrow will not accrue compound interest. And TSP loans won’t help you build or improve your credit since payments aren’t reported to the credit bureaus.

While you’ll be paying interest back to yourself on a TSP loan, remember that you’ll be doing so with after-tax dollars. This means that when you begin receiving disbursements from the account upon retirement, you will pay taxes again on the same funds.

You’ll also want to ensure you can repay the monthly TSP loan payments. Use the TSP loan payments calculator to determine how much you can expect to pay each month. You could also be taking on a significant risk if you leave your federal job with an outstanding loan. In this situation, you have the option to keep paying the loan monthly, pay it off by the set deadline or let it be foreclosed in 90 days and take on the remaining debt as taxable income.

Alternatives to a TSP loan

TSP loans won’t help you build or improve your credit since payments aren’t reported to the credit bureaus. If a TSP loan isn’t the right path for you, there are alternatives you can consider.

• Using personal savings. Ideally, should have a buffer in the form of a savings account or emergency fund to help with any unexpected expenses.
• A personal loan can be an alternative for unexpected expenses. When taking this path, make sure you can afford to keep up with the monthly payments using a personal loan calculator and by prequalifying with multiple lenders.
• A home equity loan is a reasonably low-cost option for funding home improvement projects, and when you use your equity like this, it may be tax-deductible as well.
• A 0% APR credit card may be the fastest route to borrowing money, especially if the amount you need is on the smaller side.
• If your reason for borrowing points to overall tough financial circumstances, seeking financial counseling may be the answer. Doing so can help you address the root issues without negatively impacting your retirement funds.

Bottom line

You may borrow a TSP loan from your own TSP retirement account if you are a uniformed service member or a federal employee. TSP loans can be a helpful and potentially more affordable option for consolidating debt or funding large expenses like medical bills or home purchases.

Although there are important things to consider when applying for a TSP loan, low interest rates and easy qualification make it a solid alternative to personal loans or home equity loans.