The Truth about TSP Loans, and when they make sense

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What is a TSP Loan?

The Thrift Savings Plan Loan (or TSP Loan) is a way to borrow money from your Thrift Savings Plan, and repay it to yourself at an affordable interest rate.

TSP loans are fairly quick and painless to utilize and offer some flexibility regarding uses and payback schedules.

Ultimately, the TSP Loan is a pretty cool benefit for service members if you understand the best ways to use it.

There are Two Types of TSP Loan

General Purpose

The general purpose TSP Loan can be used for any purpose, requires no documentation, and has a repayment period of 1-5 years.

Residential (sometimes referred to as the TSP Home Loan by people)

The Residential TSP Loan May be used for the purchase or construction of a primary residence, requires documentation, and also has a repayment period of 1-15 years.

For the Residential TSP loan, there are a lot more rules than with the general purpose.

TSP Loans

You can only use a residential loan for purchasing or constructing a primary residence, which may include any of the following:

  • House
  • Townhouse
  • Condominium
  • Shares in a cooperative housing corporation
  • Boat
  • Mobile home
  • Recreational vehicle

You cannot use a residential loan for

  • refinancing or prepaying your existing mortgage
  • construction of an addition to your existing residence
  • renovations to your existing residence
  • buying out another person’s share in your current residence
  • purchasing land only
  • Your primary residence must be purchased in whole or in part by you, or your spouse.

Who is Eligible to Take Out A TSP Loan?

I opted to take the answer for this straight out of the TSP.Gov website

  • must be an active federal employee or a member of the uniformed services.
  • must be in pay status because repayments are set up as payroll deductions.
  • can only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time.
  • must have at least $1,000 of your own contributions and earnings in your account (agency/service contributions and earnings cannot be borrowed).
  • must not have repaid a loan of the same type in full within the past 60 days. (If you have both a civilian account and a uniformed services account, the 60-day waiting period applies separately to each account.)
  • must not have had a taxable distribution of a loan within the past 12 months unless it was due to your leaving federal service.
  • must not have a court order against your account.

How much Money can I Borrow with a TSP Loan?

The minimum amount you can borrow is $1,000

The maximum amount you can borrow is the smallest of the following:

  • Your own contributions and earnings on those contributions in the TSP account you’d like to borrow from, not including any outstanding loan balance;
  • 50% of your vested account balance (including any outstanding loan balance) or $10,000, whichever is greater, minus any outstanding loan balance (see note below); or
  • $50,000 minus your highest outstanding loan balance, if any, during the last 12 months (see note below).

How Do I Repay my TSP Loan?

You must begin repaying your loan within 60 days.

No need to stress too much about that though because loans are repaid via payroll deductions. For example, if you’re an active duty service member earning $4,000/month base pay, and you take out a TSP Loan with a monthly repayment amount of $1,000/month, you will only receive $3,000/month in base pay until the loan amount is repaid in full.

Pros of utilizing the TSP Loan

Despite what I’m going to tell you in the “cons” section, the TSP loan is a pretty good product, and there are definitely some “pros” associated with it!

Quick access to cash

Once you successfully complete the TSP Loan application you will receive funds within 7-10 business days via check mailed to your address on file. At this time, the TSP.Gov does not offer an electronic deposit for these funds.

Idk about you, but 7-10 day funding is pretty fast compared to most loan products out there.

The TSP Loan is a Low-Cost Loan

Loan Cost

There is a $50 loan fee charged for administrative purposes. This amount is deducted from your loan proceeds. So If you borrow $50,000 the fee will be deducted from that and you will actually receive $49,950 in your bank account.

Interest Rate

Your interest rate for repaying the TSP Loan is whatever the G Fund was earning on the date your loan is processed. Currently, (02/19/2022) the current interest rate for repayment is 1.875%.

The loan interest is not taxable, but it goes back into your TSP balance—You’re essentially paying yourself that interest rate!

Flexible use (unsecured)

Ultimately, if you use the general-purpose TSP Loan you can pretty much do anything you want with it. This opens a lot of opportunities, but make sure you still need to make sure you’re using the funds wisely—there are several cons to borrowing this money.

Cons of utilizing the TSP Loan

Here is where I attempt the difficult task of ruining this loan for you despite all of the above reasons it is a great loan product. The problem is that most of the reasons this isn’t great are intangible…but trust me, they can be catastrophic.

Tax Implications if You’re Borrowing from the Traditional TSP

A commonly overlooked issue with the TSP loan is the additional taxes you’ll be paying on that money. Consequently, this is the one tangible reason that a TSP loan is not the best way to borrow money.

Who Doesn’t Love Being Taxed Multiple Times?

When you contribute to the Traditional TSP you are contributing Pre-Tax dollars. However, when you are repaying the TSP loan you will be doing so with post-tax dollars. That erases the entire benefit of the traditional TSP in the first place!

To make matters even worse, because the traditional TSP is taxed on the back end, and contributed to with pre-tax dollars you will be taxed twice on the money that you borrowed.

Think about it, if you repay the loan with post-tax dollars (meaning you already paid taxes once) and the traditional TSP is taxed at withdrawal…you’ll be paying taxes a second time on that money now, which is not cool!

Taxable Event if You Fail to Repay the TSP Loan

Here’s another fun con, if you fail to repay your loan the IRS will view the loan as a taxable withdrawal of funds. You will be assessed an instant 10% penalty in taxes that you owe the IRS!

Talk about a “fun” bonus to have your loan costs suddenly jump 10% immediately!

Opportunity cost

Let me paint a picture for you; Let’s say you took a loan for $10,000 in January of 2021, and let’s assume the interest rate was an easy 2%, and you repaid it in full in exactly 12 months.

In the above scenario, you would have paid $200 in interest, for a total of $10,200 paid back to yourself.

Now, what if I told you that money could have earned over 40% ROI if you had just left it in the TSP? I know this sounds crazy, but my personal TSP returns for 2021 were 44.61%!

In this scenario, your account would have grown by $4,000.

By taking the TSP loan your balance at the end of January 2022 (12 months from loan inception) would be $10,200 instead of $14,000—The TSP Loan actually cost you 38% in opportunity cost.

Now, obviously, the argument is “Well Dave, what if the market goes down while I have the loan out” and you’re correct. However, markets generally trend up over time, and attempting to time the market is a losing game.

Ultimately, you need to understand that there is a good chance the TSP loan will cost you a lot more than the interest rate you’re repaying.

Risk of Ruin

I view my Thrift Savings Plan as my “super-duper emergency fund” that I will only touch in a worst-case scenario. For example, in March of 2020 when COVID first started to wreak havoc on landlords I was able to look at the balance of my TSP and say “well, worst case scenario I have enough money in there to pay all of my mortgages for 18 months even if my tenants don’t pay me a penny”.

In my opinion, you can’t put a price on that security, and you lose that if you borrow from the balance.

Also, the TSP is your retirement fund. You’re borrowing from your future self in order to fund your current lifestyle. You need to make absolutely certain that you’re not assuming a risk that could wipe out your loan amount and harm your future self.

Never assume the risk of ruin!

Should you Use A TSP Loan?

Ultimately, that depends on what you’re using it for, and your confidence in repayment.

Here are my thoughts as a rule of thumb.

If you need to take a personal loan, the TSP is a simple and efficient way to do so. If you have an emergency arise, the TSP Loan is a decent option for digging yourself out of that hole.

If you’re looking to use a TSP Loan to buy an investment I would caution you to think through all of the indirect costs and risks associated with borrowing these funds.

For the record, just yesterday I told somebody who was about to withdraw $50k from their TSP and lend it to me to help fund a deal, that I didn’t think it was the right move for him.

I really do believe that time in the market is one of the most important things to maintain with your Thrift Savings Plan.

I promise you, there are better ways to borrow money out there 😊

Additional Thrift Savings Plan Articles

How to invest in the Thrift Savings Plan

Advanced TSP Strategies That Will Make You Rich

Avoid These 7 Thrift Savings Plan Mistakes

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David Pere

David Pere

David is an active duty Marine, who devotes his free time to helping service members, veterans, and their families learn how to build wealth through real estate investing, entrepreneurship, and personal finance!

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