As you navigate through your personal finance journey, the option of taking a loan from your Thrift Savings Plan (TSP) may arise. While a TSP loan can offer a source of financial support, it’s crucial to have a comprehensive understanding of the process and implications before making a decision. In this blog post, we will cover seven key questions that will help you make an informed choice when considering a TSP loan.
Do I Qualify for a TSP Loan?
Qualifying for a TSP loan is relatively straightforward. As your own lender, the requirements are minimal. You must be currently employed in the federal government or military, have at least $1,000 in your TSP account from your contributions and associated earnings, not have fully repaid a previous TSP loan in the last 30 days, and have no unsatisfied court orders against your account. The best part? There are no credit checks, and borrowing won’t affect your credit score.
What Are My Loan Options?
There are two types of TSP loans: general purpose loans and primary residence loans. General purpose loans can be used for any need without documentation and its repayment period is one to five years. On the other hand, primary residence loans are strictly for buying or building your primary home and its repayment period is 5 to 15 years. Documentation showing the purchase costs or construction costs of your new home must be submitted within 30 days of the loan request.
You can only have two loans at once. One can be a general purpose loan and the other a primary residence loan, or you can have two general purpose loans simultaneously. However, you can’t have two primary residence loans at the same time. If you have both a civilian and a military account, these limits apply separately to each TSP account.
How Much Can I Borrow?
You can only borrow money that is invested in the TSP’s core funds and lifecycle funds. The minimum you can borrow is $1,000, with the maximum capped at $50,000 or less, depending on your contributions and earnings. The borrowed amount is distributed proportionally from your traditional and Roth balances in the TSP account.
What Are the Interest Rates and Costs?
TSP loans feature relatively low costs, with interest rates tied to the G Fund’s rate of return. Your interest rate will remain fixed for the life of the loan. There are minimal fees of $50 for general purpose loans and $100 for primary residence loans. These fees are deducted directly from the loan amount. While the direct costs are low, it’s also important to consider the indirect costs of potential lost investment growth on the borrowed amount.
How Is the TSP Loan Repaid?
TSP loans are repaid through payroll deductions, ensuring a hassle-free process. You can also make additional payments to clear the loan faster, with no penalties for early repayment. Remember, if you switch jobs or leave employment, you must manage loan payments accordingly to avoid tax implications.
How Do I Apply for a TSP Loan?
Applying for a TSP loan is convenient through the online portal. Spousal consent is required for married individuals, but repayment remains the borrower’s responsibility. Once approved, funds are typically disbursed within three business days via direct deposit.
Should I Take a Loan from My TSP?
Deciding whether to take a TSP loan is a personal choice. If you have other money available for your needs, it’s smart to use that first to avoid impacting your retirement savings. If you have decent credit, want low rates, and can repay the loan, a TSP loan might work for you. Consider how secure your job is and how long you plan to stay in the government or military before borrowing. Leaving with an outstanding loan could lead to hefty taxes.
We hope you enjoyed this blog post. If you have any questions or concerns about federal benefits or retirement planning, connect with us. Here are a couple of ways that we can help:
- Book a free 45-minute consultation with a Fedway Financial Advisor.
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