Federal Employees / Military Members: Pros and Cons of borrowing money from Thrift Savings Plan (TSP)

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The Thrift Savings Plan (TSP) offers loans to federal employees and military personnel, allowing them to borrow against their retirement savings. Here’s a breakdown of the pros and cons of borrowing money from your TSP account:

Pros​

1. Low Interest Rates: TSP loans typically have lower interest rates compared to other loan options like personal loans or credit cards. The interest rate is equal to the G Fund's interest rate at the time the loan is processed.
2. No Credit Check: Borrowing from your TSP does not require a credit check, making it an accessible option for those with poor credit.
3. Repayment Flexibility: Repayments are made through payroll deductions, which can be convenient and help ensure timely payments.
4. Use for Various Purposes: You can use a TSP loan for general purposes (up to $50,000) or for the purchase of a primary residence (up to $50,000).
5. Potential Tax Benefits: If you use a residential loan for a home purchase, the interest you pay might be tax-deductible (consult a tax advisor for specifics).
6. No Early Withdrawal Penalty: Taking a TSP loan is not considered an early withdrawal, so it does not incur the 10% penalty that applies to early withdrawals from retirement accounts.

Cons​

1. Reduced Retirement Savings: Borrowing from your TSP reduces the amount of money working for you in your retirement account, potentially affecting the growth of your savings over time.
2. Opportunity Cost: The money borrowed from your TSP is not invested, which means you might miss out on potential investment gains.
3. Repayment Risk: If you leave federal service before repaying the loan, the outstanding balance is due within 90 days. If not repaid, it will be considered a taxable distribution, and you may owe income tax and a possible 10% early withdrawal penalty if under age 59½.
4. Double Taxation on Interest: While you repay the loan with interest, the interest is not tax-deductible. Additionally, you pay the loan interest with after-tax dollars, and you will pay taxes again when you withdraw these funds in retirement.
5. Strict Repayment Terms: TSP loans have specific repayment terms (up to 5 years for general purpose loans and up to 15 years for residential loans). Failure to adhere to these terms can result in the loan being declared a taxable distribution.
6. Impact on Contributions: Loan repayments do not count as contributions to your TSP account. Therefore, if you reduce your regular contributions to compensate for loan repayments, it could further diminish your retirement savings.

In summary, while borrowing from your TSP can be a viable option in times of need due to its lower interest rates and lack of credit checks, it's important to consider the long-term impact on your retirement savings and weigh these factors against other potential borrowing options.


How much can I borrow?


The minimum amount you can borrow is $1,000.
The minimum amount you can borrow is $50,000.
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Repayments

General Purpose - Up to 5 years
Residential Loan - Up to 15 years

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