You would be amazed at the amount of TSP members who are not aware of the huge benefit a TSP Loan could potentially bring. Both federal employees and service members are able to borrow money from their Thrift Savings Plan and in some instances it can extremely benefit an individuals financial situation.
How Does A TSP Loan Work?
If and when you decide that a TSP loan would be in your benefit, you borrow the specific amount from your TSP account.
The amount borrowed from TSP portfolio cannot exceed the amount of your own contributions and earnings from those contributions. Simply put, you only have access to the money you have contributed, not the money the federal government has matched, contributed, or the earnings from their contributions.
For example, if Jim is a federal employee and contributes five percent of his $50,000 annual salary (which equates to $2,500), and his agency matches his contributions with $2,500. He only has access to the $2,500 he contributed himself. Not the full account value of $5,000 ($2,500 contribution + $2,500 agency match).
If your loan request is approved, the loan amount is removed from your TSP account and issued to you at the current G Fund Interest Rate. As of February 1, 2016 the interest rate is 1.875%
You must repay your loan with interest. Repayments for the loan and interest are generally made through payroll deductions. Your repayments restore the amount of your loan, plus interest, to your TSP account.
There are two types of loans:
- General Purpose Loan - This is the easiest loan to qualify for hands down, it requires no documentation and can be used for anything you choose. You must repay within 1-5 years.
- Residential Purpose Loan - This loan must be used to purchase your primary residence and must be repaid within 1-15 years. You must provide documentation, this loan will take a little longer to get approved for.
Here is a great resource if you're considering a TSP loan but want to calculate the costs of your loan before applying.
How Are TSP Loans Repaid?
Once you have successfully taken out a TSP loan your payroll office will immediately start deducting your payments from your paycheck every pay period. Make sure to check your paystub and ensure these payments are being made and that they are the right amount. You are responsible for making these payments regardless of whether your agency or service misses a payment.
That is it in a nutshell but there are a couple other things to consider with your TSP Loan:
- Extra Payments - You can make extra loan payments in addition to your payroll deduction at any time using a personal check, cashier's check, or money order. Simply send , Loan Payment Coupon with your extra payments.
- Missed Payments - Remember, you are ultimately responsible for making payments. In the case you miss a payment, at the end of every quarter the TSP identifies accounts with missed payments. If you have missed more than 2.5 payments, the TSP will send a notice indicating that you have until the end of the following calendar quarter to pay the missed amount. You must pay the missed amount directly to the TSP using your own personal funds to avoid a taxable distribution. Your payroll office cannot make up missed payments from your pay.
- How To Track Your TSP Loan - In your quarterly TSP participant statement the TSP will report your TSP loan activity/transactions for that time period. You can also track your TSP loan balance and payments via the TSP website under "My Accounts."
TSP Loan Borrowing Limits & Costs
The minimum TSP loan amount an individual can obtain is $1,000 - While the maximum loan amount is $50,000. Remember this is all dependent on the amount of contributions and/or earning on those contributions in your TSP account.
The great thing about taking advantage of a TSP Loan are the clear costs associated with the loan. For example:
Loan Application Fee - The TSP charges a loan fee of $50 for administrative expenses. The TSP deducts the fee from your loan proceeds. For example, if you request a loan for $1,000, the amount paid to you will be $950. Additionally, if you request a loan for $5,000, the amount paid to you will be $4,950.
Interest - The interest rate on your TSP loan is the G Fund rate at the time your loan application is processed. This rate is fixed for the life of the loan. Although TSP loan interest is not tax-deductible, all of the interest goes back into your TSP account.
Indirect Cost - It is important to note, although you pay the loan amount plus interest back to your TSP, the amount of interest paid may be less than what you might have earned if the money had remained in your TSP account. This is why it is imperative you make sure you are disciplined in how you use a TSP loan.
How To Apply For A TSP Loan
You can apply for a TSP loan online or by submitting Form TSP-20 to the TSP at the address indicated on the form.
If you want to submit your application online then simply complete the loan application by going to the My Account section of the TSP website. If you are married, by law your spouse has certain rights to your TSP account. When requesting a loan, you must indicate if you are married, even if you are separated from your spouse.
- FERS or Service Members: Your spouse must consent to your TSP loan by signing the Loan Agreement.
- CSRS participants: The TSP must notify your spouse when you apply for a loan.
Applying for a TSP Loan is a fairly simple process and the benefits of obtaining a TSP loan can be outstanding in many circumstances. Unfortunately there are some circumstances where taking out a TSP Loan will be severely detrimental to your long term wealth. Please ensure you take the time to analyze if a TSP loan is best for your situation.