Borrowing Money from Your Thrift Savings Plan
If you’re a federal employee in need of low-cost financing for a home, debt consolidation, or any other financial need, your thrift savings plan (TSP) could be a great option. A TSP is a retirement plan specifically for federal employees and members of the uniformed services. Every year, you can contribute up to a set limit, with earnings building up over time. In addition, certain agency employers may match your contributions up to a certain amount. The best part? You can even borrow against your loan balance. While this might seem like a good idea, there are some factors to consider before making a decision.
How to Take Out a Loan from Your Thrift Savings Plan
Qualifying for a loan from your thrift savings plan is a relatively simple and cost-effective process compared to other loan options. As of October 2020, the interest rate for TSP loans was a mere 0.75%. In comparison, the average mortgage rate was 2.88%, the average car loan rate was 5.14%, and the average credit card rate was 15.78%. Borrowing from a TSP is also straightforward in terms of paperwork and approval, as you are essentially borrowing from your own savings. The process typically involves no credit checks, less paperwork, and minimal chances of being denied the loan. To qualify for a TSP loan, you generally need to be a federal employee in pay status without any recent repayments on a previous TSP loan or taxable distributions from your savings plan. There are two loan options available: the General Purpose loan for most financial needs and the Residential Loan for purchasing or constructing a primary residence.
How Much Can You Borrow from a Thrift Savings Plan?
There is a borrowing limit on TSP loans ranging from $1,000 to $50,000, depending on your contributions and earnings. It’s important to note that your borrowing options may be restricted if you have certain outstanding TSP loans, recent repayments, taxable distributions, or court orders against your TSP.
The Drawbacks of Borrowing from Your Thrift Savings Plan
Despite the advantages of easy access and low costs, borrowing from a thrift savings plan has some downsides to consider. You won’t earn interest on the loan, impacting your long-term retirement savings. Instead of accruing interest, you will be paying it back, and any unpaid amounts may be treated as taxable loan distributions. Repaying a TSP loan could also affect your ability to make voluntary contributions, potentially affecting the growth of your retirement fund and delaying your retirement age.
How Will a TSP Loan Affect Your Credit?
Since you are essentially borrowing your own money, a thrift savings plan loan does not require a credit check. The loan repayment history is also not reported to major credit bureaus, meaning it won’t affect your credit score. Defaulting on the loan won’t impact your credit score either, but it could result in a penalty if you're under age 59 ½.
Making a Final Decision
If you can manage to continue making voluntary contributions while repaying the loan, you can mitigate some of the drawbacks of borrowing from your thrift savings plan. However, defaulting on the loan could have serious consequences for your retirement and tax liabilities. Keep in mind that any amount borrowed from your retirement account isn't growing for your future.
