Should You Borrow From Your Thrift Savings Plan?

Pros and Cons of TSP Loans

Couple reviewing investment paperwork

If you’re a federal employee looking for a low-cost way to borrow money for a home, consolidate your other debt, or fill another financial need, your thrift savings plan (TSP) may be very appealing.

A thrift savings plan is a retirement plan for federal employees and members of the uniformed services. Each year, you can contribute up to the annual limit and earnings accumulate over time. Certain agency employers also match your contributions up to a specified limit. Better yet, you can borrow against your loan balance. This isn't always a good idea, however. Let's take a look at how it works and how to decide whether it's a good move.

How to Borrow From Your Thrift Savings Plan

Qualifying for a loan from your thrift savings plan is relatively easy and less expensive compared to most other types of loans.

The interest rate for TSP loans as of October 2020 was 0.75%. Meanwhile, the average mortgage rate was 2.88%, the average rate for a 60-month car loan was 5.14%, and the average credit card rate was 15.78%. 

Borrowing from a TSP is also relatively easy compared to other forms of borrowing. Because you’re tapping into your own savings, there’s less paperwork, no credit qualifications, and the likelihood of being turned down for the loan is very low. You’ll typically qualify to borrow from your thrift savings plan as long as you’re a federal employee in pay status and you haven’t recently repaid another TSP loan or taken a taxable distribution from your savings plan.

You have two options for borrowing from your TSP. You borrow a General Purpose loan for most of your non-real estate financial needs. The General Purpose loan doesn’t require any additional documentation, but you do have to repay the loan within five years. If need to borrow from your TSP to purchase or construct a primary residence, the better option is to take out a Residential Loan. This type of TSP loan does require additional documentation and can be repaid in up to 15 years.

How Much Can You Borrow From a Thrift Savings Plan?

There’s a limit to the amount you can borrow from your thrift savings plan. Depending on the amount of financing you need, other forms of borrowing may be a better option. You can borrow between $1,000 and $50,000, but the maximum loan amount cannot exceed the amount you’ve contributed plus earnings on your contributions.

Your borrowing options may be limited if have another outstanding TSP loan of the same type you’re applying for, you’ve repaid a loan within the past 60 days, you’ve taken a taxable distribution within the past year, or you have a court order against your TSP.

The Downside of Borrowing From Your Thrift Savings Plan

While the ease and low cost of borrowing from a thrift savings plan can make it an attractive option, there are some downsides to consider.

  • You won’t earn any interest on the outstanding loan amount, which will affect your long-term retirement savings.
  • Instead of earning interest on your retirement savings, you’ll have to pay interest as you replace the funds you’ve borrowed.
  • Any amount not paid back on time may be counted as a taxable loan distribution.

Repaying a TSP loan may affect your ability to make voluntary contributions to your plan if you can’t afford to repay your loan and make contributions. Unfortunately, reducing your contributions will slow the growth of your retirement fund and could possibly delay your retirement age.

Will a TSP Loan Affect Your Credit?

Because you’re technically borrowing your own money, taking out a thrift savings plan loan doesn’t require a credit check. That means you can avoid a ding to your credit score that’s caused when you apply for other loans. Repaying your TSP loan also won’t help or hurt your credit score because your payment history isn’t reported to any of the three major credit bureaus.

Defaulting on your TSP loan won’t hurt your credit score, either, but there are still consequences. Because any unpaid amount will be treated as a taxable distribution from your retirement savings, you may be charged a 10% early withdrawal penalty if you are under age 59 ½.

Making a Final Decision

If you can afford to continue voluntary contributions while you also repay your loan, you can offset some of the downsides of borrowing from your thrift savings plan. However, keep in mind that defaulting on your loan can derail your retirement and hit you in the wallet when it comes to taxes. Remember, too, that any amount not left in your retirement account isn't growing for your retirement years.

Article Sources

  1. Thrift Savings Plan. "What Is the Thrift Savings Plan (TSP)?" Accessed Oct. 2, 2020.

  2. Thrift Savings Plan, "News and Resources," Accessed Oct. 2, 2020.

  3. Federal Reserve Bank of St. Louis. "30-Year Fixed Rate Mortgage Average in the United States," Accessed Oct. 2, 2020.

  4. The Federal Reserve. "Consumer Credit - G.19," Accessed Oct. 2, 2020.

  5. Thrift Savings Plan. "Summary of the Thrift Savings Plan," Page 16-17. Accessed Oct. 2, 2020.

  6. Thrift Savings Plan. "Loan Types and Terms." Accessed Oct. 2, 2020.

  7. Thrift Savings Plan. "Alternatives to Withdrawals." Accessed Oct. 2, 2020.

  8. IRS. "What if I Withdraw Money From My IRA?" Accessed Oct. 2, 2020.