TSP Loan Explained
Have you ever contemplated borrowing from your Thrift Savings Plan (TSP)? You should know that TSP loans are an efficient way to borrow money from your retirement savings, allowing government employees and military personnel to access their hard-earned assets.
In this article, we’ll explain a TSP loan and how it can help you.
What is a TSP Loan?
A TSP gov loan is a one-of-a-kind loan available to current and past members of the United States military and federal employees, allowing them to borrow from their TSP account. It works similarly to a 401(k) loan but is only available to federal employees and military members. Your loan amount is limited to what you have paid to your TSP account.
How Does a TSP Loan Work: Here’s How to Get a TSP Loan!
In this loan, you can borrow up to the total value of your TSP account assets with a TSP loan. The interest rate on your loan will vary depending on how much you borrow and how you repay it. The loan must be repaid within one to five years. Your payback contributions will be collected from your salary before taxes. Because loan repayments count toward your overall TSP contribution limit, you may need to change your donation amounts to meet the loan payments.
General purpose loans, like personal loans, can be used for anything. No documentation is required for this loan, and repayment durations range from one to five years, depending on the amount borrowed.
A TSP home loan can be used to purchase or build a primary residence. This loan requires paperwork and can be repaid for up to 15 years. It should be noted that residential loans cannot be used to refinance or prepay a mortgage, nor can they undertake additions or renovations to a property. The loan application must provide proof that you or your spouse are buying the property, proof of the purchase price, and proof of the property’s location.
The amount you can borrow for both is limited. The restrictions become a bit complicated, but the most you may usually borrow is the lesser of 50% of your vested account balance or $50,000. The amount is restricted to your contributions and gains on those contributions.
The median home price in the United States above $300,000 — considerably above the maximum you may borrow from a TSP — limits the utility of residential loans to assist with a down payment or closing costs.
TSP loans have fixed interest rates that are currently relatively low: 0.875% at the time of publishing. The interest rate in place when the loan was made remains in force for the duration of the loan. The TSP.gov loan payment calculator can help you understand how monthly payments will work based on your loan.
Applying for a loan is simple, with an online application on the TSP website and a $50 administrative fee. You can use it by mail, but it will take longer to get the funds. Because spouses have rights in a TSP account, married applicants must also obtain their spouse’s approval.
A Thrift savings loan is likely to be small enough to purchase a home, but it can be a helpful way to save for a down payment. If the application is submitted online, the loan will be issued as a check-in for eight to thirteen days.
Meet specific circumstances, such as being a civilian who chooses to serve in the military. Your loan may enter a state known as “non-pay status,” during which payments may be delayed for up to a year or the duration of military service.
What Are the Advantages of a TSP Loan?
A TSP loan may be an appealing alternative for some borrowers due to the numerous benefits it provides, such as:
Rate of Interest: The interest rate on a TSP loan is based on the 91-day US Treasury bill interest rate, making it a competitive option compared to other loan products.
Choice: A TSP loan is available with repayment options ranging from one to five years, allowing flexibility in handling your loan repayment.
Tax Advantages: TSP loan repayments are deducted from your paycheck before taxes, which can help reduce your total tax bill; however, this benefit is only available for loans used to purchase a primary dwelling.
Simple Application: Applying for a TSP loan is simple, and your application will be handled promptly.
What Are the Disadvantages of a TSP Loan?
Although there are numerous advantages in borrowing money from TSP, there are some disadvantages to consider like the following:
High Fees: All loans have a $50 Tsp loan rate origination fee; additionally, depending on the repayment length, the loan may be subject to additional fees.
Account Diversity: A loan from TSP might diminish your account’s diversification, exposing you to more risk if your investments are not appropriately allocated.
Tax Implications: If you quit your job, miss a loan payment, or do not have enough money to repay the loan in full by the end of the term, the loan, plus interest, becomes a taxable distribution, and you may be subject to an early-withdrawal penalty.
Why Should You Apply for a TSP Loan?
A TSP loan can be a valuable option to get funds to address an immediate need; nevertheless, there are some dangers to consider before applying. Here are some questions to consider before making this critical decision.
Before you decide to take out a loan, evaluate why you are doing so and whether it is an emergency. After understanding the repayment terms, you must determine if you can afford the payments. Consider different loan options and whether another choice may be more beneficial.
A TSP loan might be an excellent way to access your retirement resources. However, it is critical to understand the benefits and cons of a TSP loan to make the best decision for your financial well-being.
When Should You Apply for a TSP Loan?
Retaining assets should always be the last choice when faced with financial difficulties. However, you do need to borrow money. In that case, you have several options, including personal loans, credit cards, and, in some situations, a home equity loan or line of credit.
However, credit cards have high-interest rates; you may not qualify for a personal loan with a reduced interest rate, and you can only acquire a home equity loan or line of credit if you own your property.
Underwriting is the process by which lenders evaluate income, assets, and other facts before issuing a loan. TSP loans make sense for people who satisfy the qualifications if they need money to pay critical daily costs after a loss of income or an emergency.
Final Thoughts
Suppose you have a TSP account and are eligible to borrow from it. In that case, the low-interest rates and simple payback are better options than alternatives especially with the current TSP loan requirements. If you’ve lost your work, are facing reduced hours or income, or still need to establish an emergency fund, you may need to borrow money.
However, suppose you have other options for dealing with debt or late bills, such as payment plans, negotiating with lenders, or borrowing money from your family. In that case, those may help you get by rather than taking money from your future self.
