A TSP loan is a form of borrowing that enables federal employees or uniformed members to take money from their Thrift Savings Plan. In other words, it involves obtaining a loan from your savings. Additionally, securing a TSP loan is simple, although if the intention is to use the funds for housing, additional paperwork might be required. The borrowing range for TSP loans starts at $1,000, but the maximum amount is based on certain factors.
For instance, you cannot borrow more than 50 percent of your personal account balance or $10,000, whichever is greater. Additionally, you cannot borrow more than $50,000, minus any TSP loans acquired in the previous year. The repayment duration varies depending on the purpose of the loan. Thereby allowing a maximum of 5 to 15 years with a fixed interest rate. Lastly, payments can be deducted directly from your paycheck.
How Does it Work?
Securing a TSP loan is the same as borrowing from a 401(k), withdrawing funds from your retirement savings to be repaid within a specified timeframe. In both a 401(k) loan and a TSP loan, your employer withdraws amounts from your paycheck and uses them to pay back the loan along with interest.
Additionally, the interest rate is determined by the G Fund’s interest rate, a money-market retirement fund accessible to federal employees. Throughout the loan term, you are subject to an interest rate corresponding to the G Fund rate on the loan initiation date.
Moreover, a $50 administrative fee is charged when obtaining a TSP loan. The loan amount ranges from a minimum of $1,000 based on factors such as your TSP account balance and existing TSP loans.
Furthermore, the maximum loan amount can reach up to $50,000. Also, both home and general-purpose loans can be secured, but an account cannot have more than one of each loan simultaneously.
In addition, you must settle an outstanding TSP loan within 90 days from the date your separation is reported by your agency or service. Repayment options include paying the entire loan, partially paying back the remaining balance while accepting a taxable distribution, or securing a taxable distribution.
However, failure to pay back the entire loan will result in a payment of federal income tax on the unpaid balance. Also, individuals under 55 years old may face a 10% early withdrawal penalty from the IRS.
Types of TSP Loans
Generally, there are two forms or kinds of TSP loans, which are highlighted below:
General Purpose
These loans offer flexibility for any purpose, and don’t mandate documentation. It also comes with a repayment period lasting one to five years. Additionally, it comes with a $50 processing fee.
Residential
It is exclusive to the securement or construction of a basic residence. However, this category demands documentation and features a repayment timeframe ranging from one to 15 years. Additionally, a $100 processing fee is associated with these loans.
TSP Loan Requirements
The requirements for a TSP loan apply to your employment status and the balance within your TSP account. To qualify, you must presently work for the federal government or serve in the uniformed services.
Additionally, a low account balance is required. Although, this varies based on the type of loan, either a general-purpose or residential loan. Also, it’s crucial to note the diverse TSP loan options, each with various criteria and purposes.
General-purpose loans, usable for any purpose, come with a repayment period of one to five years. Also, residential loans, designed for home-related expenses, extend the repayment window to a maximum of 15 years.
The TSP plan permits two concurrent loans, with the requirement that a new loan cannot be initiated within 60 days of fully repaying a prior one. The application process underscores the significance of documentation.
How to Get a TSP Loan
Securing a TSP loan involves a structured process. This aspect enlists each step, starting with confirming your eligibility and concluding with the commencement of regular loan payments.
Evaluate Loan Requirements and Types
This first step involves confirming your federal service employment status and ensuring that your TSP account balance surpasses the specified threshold for loan qualification. Furthermore, you will need to choose between the types of TSP loans available.
A general-purpose loan, suitable for various needs, comes with a shorter loan term (12 to 60 months). Also, a residential loan, intended for purchasing a primary residence, extends over a longer period (61 to 180 months).
Lastly, reaching out to a financial advisor could be beneficial, helping you evaluate your objectives and available options.
Calculate the Loan Amount
In this step, you are allowed to calculate the desired loan amount. You can get a loan amount of $1,000 up to a maximum of 50% of your account balance or $50,000, choosing the lower of the two.
However, it’s advisable to assess your financial requirements and borrowing capabilities cautiously to safeguard your retirement savings. When determining the loan amount, take into account the interest rate and your ability to repay. Online loan calculators can serve as useful tools in this evaluation.
Complete Documentation
After settling on the loan type and amount, the next step involves completing the necessary documentation. Typically, this holds particular importance for residential loans, where evidence of a primary residence purchase or construction is essential.
To avoid delays, it is crucial to fill out all documents and offer the required proof of identity and requirements.
Submit a Loan Application
The formal submission of your loan request is the next step after completing the documentation. This can be accomplished on the TSP website or by sending a paper loan application, which is accessible for download on the TSP website.
However, before submitting the request, it is right to thoroughly review all entries and attachments to ensure a seamless approval process.
Pay-back Loan as Scheduled
Meeting to pay back a TSP loan as scheduled stands as an essential measure in securing your financial future. However, frequent repayments, usually deducted directly from your paycheck, guarantee the continual replenishment of your retirement fund.
Moreover, it’s important to note that any delays or defaults in paying back may lead to penalties and tax liabilities, affecting your credit score. Also, punctual repayments enable a convenient transition of the amount paid back into your investment mix.
Conclusion
TSP loans can serve as a useful resource for purposes such as consolidating debt or financing substantial expenses like medical bills or home purchases. Moreover, uniformed service members or federal employees have the advantage of borrowing a TSP loan from their personal TSP retirement account.