Thrift Savings Plans (TSPs) are retirement plans for federal employees and members of the uniformed services. They offer the same kinds of benefits and tax advantages that private employers can offer their employees through a 401(k).
Like 401(k)s, TSPs allow savers to take out loans from their own savings. Borrowing against your retirement can be risky business, so it’s important to understand the ins and outs of TSP loans before you make a decision.
What Are Thrift Savings Plan Loans?
A TSP loan allows federal workers to borrow from their retirement savings. They must pay interest on the loan; however, that interest is paid back into their own retirement account. In 2022, interest rates were 3%, typically lower than the rate private employees pay on 401(k) loans.
Before you can borrow from your account the following must be true:
• You have at least $1,000 of your own contributions invested in the account.
• You must be currently employed as a federal civilian worker or member of the uniformed services.
• You are actively being paid, as loan repayments are deducted from your paycheck.
• You have not repaid a TSP loan in full within the last 30 days.
How Do Thrift Savings Plan Loans Work?
There are two types of TSP loans. General purpose loans may be used for any purpose, require no documentation, and have repayment terms of 12 to 60 months.
Primary residence loans can only be used to buy or build a primary residence. They must be repaid in 61 to 180 months, and they require documentation to qualify. You cannot use primary residence loans to refinance or prepay an existing mortgage, add on to or renovate your existing home, buy another person’s share in your home, or buy land only.
Recommended: A Guide to Personal Loans to Buy Land
Pros and Cons of a Thrift Savings Plan Loan
As you weigh whether or not it’s a good idea to borrow from your retirement savings, consider these pros and cons.
Pros of a TSP Loan
Chief among the advantages of borrowing from a TSP are the relatively low interest rates compared to most other loans. Consider that the average interest rate for personal loans is 9.41% according to the St. Louis Federal Reserve.
What’s more, repayment is simple, coming from payroll deductions. There is no penalty for paying back the loan early. And you don’t need to submit to a credit check to qualify for the loan.
Cons of a TSP Loan
Despite the benefits, borrowing from a TSP is often considered a last resort due to certain disadvantages.
First and foremost, when you borrow from your retirement you are removing money from your account that would otherwise benefit from tax-advantaged compounding growth.
If you leave your job with an unpaid loan, you will have 90 days to repay it. Fail to meet this deadline and the entire loan may be reported as income, and you’ll have to pay income taxes on it.
TSP loans are not reported to the credit reporting bureaus, so they don’t help you build credit.
Does a Thrift Savings Plan Loan Affect Your Credit?
TSP loans are not reported to the three major credit reporting bureaus — TransUnion, Equifax, and Experian — so they do not affect your credit score.
Recommended: How Do I Check My Credit Score Without Paying?
How Long Does a Thrift Savings Plan Loan Take to Get?
Applying for a TSP is a relatively simple process. You can fill out an application online on the TSP website . There is a $50 processing fee for general purpose loans and a $100 fee for primary residence loans. Borrowers who are married will need spousal approval before taking out a loan.
Once the application is approved, borrowers receive the loan amount via check within eight to 13 days.
How Much Can You Borrow From a Thrift Savings Plan?
The minimum you have to borrow with a TSP loan is $1,000. Rules for determining your maximum are rather complicated. You’ll be limited to the smallest among the following:
• Your own contributions and their earnings in your TSP.
• $50,000 minus your largest loan during the last 12 months, if any.
• 50% of your own contributions and their earnings, or $10,000, whichever is greater, minus your outstanding loan balances.
According to these rules, $50,000 is the most you can borrow, and you may be limited to as little as $1,000.
Should You Take Out a Thrift Savings Plan Loan?
Because a TSP loan can have a lasting effect on your retirement savings, be sure to exhaust all other loan options before deciding to apply for one. If you are experiencing financial hardship or poor credit has made it hard for you to qualify for another type of loan, a TSP may be worth exploring.
Thrift Savings Plan Loan Alternatives
Before choosing a TSP loan, take the time to research other alternatives.
Credit Card
Credit cards typically carry very high interest rates. The average interest rate is around 14.56%, according to the St. Louis Federal Reserve. That said, if you use a credit card to make a purchase and pay off your debt on time and in full at the end of the billing cycle, you will not have to pay interest on your debt.
Credit cards only get expensive when you carry a balance from month to month, in which case you’ll owe interest. What’s more, the amount of interest you owe will compound. In order to carry a balance, you must make minimum payments or risk late penalties or defaulting on your debt.
Recommended: Differences and Similarities Between Personal Lines of Credit and Credit Cards
Passbook Loan
Passbook loans allow you to borrow money at low interest rates, using the money you have saved in deposit accounts as collateral. That money must remain in your account over the life of the loan. And if you default on the loan, the bank can use your savings to recoup their losses.
Signature Loan
Unlike passbook loans, signature loans do not require that you put up any items of value as collateral. Also known as “good faith loans,” signature loans require only that you provide your lender with your income, credit history, and your signature. Signature loans are considered to be a type of unsecured personal loan.
Personal Loan
A personal loan can be acquired from a bank, credit union, or online bank. They are typically unsecured loans that don’t require collateral, though some banks offer secured personal loans that may come with lower interest rates.
Loan amounts can range from a few hundred dollars to $100,000. These amounts are repaid with interest in regular installments.
Personal loans place few restrictions on how loan funds can be spent. Common uses for personal loans range from consolidating debt to remodeling a kitchen.
The Takeaway
For borrowers in a financial pinch, TSP loans can provide a low-interest option to secure funding. However, they can also have a permanent negative impact on retirement savings, so it makes sense for borrowers to explore other options as well.
SoFi offers low fixed interest rates on personal loans of $5,000 to $100,000. There are no fees required, and borrowers only pay principal and interest.
FAQ
What does TSP loan stand for?
TSP stands for Thrift Savings Plan, a retirement account the federal government offers to its civilian employees and members of the uniformed services.
What is a TSP loan?
A TSP loan allows Thrift Savings Plan holders to borrow from their retirement account. Loans are repaid automatically through payroll deductions, and interest payments are made back to the account.
How long does it take to get a TSP loan?
It takes eight to 13 days to receive a TSP loan from the time of application.
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