As a service member, you have access to the U.S. military’s Thrift Savings Plan, an employer-based, tax-advantaged retirement savings tool. Hopefully you’ve been contributing to your TSP, and if you’re in the military’s Blended Retirement System, you get the additional benefits of the government’s automatic and matching contributions.
One feature of the TSP is the ability to borrow money against your account balance. Financial experts don’t recommend taking out loans against retirement accounts, but if you’re stuck in a financial emergency, it might be the best of your choices. Here’s the information you need to make that decision.
How It Works
The TSP loan program allows participants to borrow funds from their TSP accounts in two primary categories: general purpose loans and residential loans.
- General purpose loans, which do not require documentation, have a maximum repayment period of five years.
- Residential loans, designated for the purchase or construction of a primary residence, require documentation and have a repayment period of up to 15 years.
Loan amounts can range from $1,000 up to 50% of the vested TSP balance, with a maximum of $50,000. The interest rate on TSP loans is the current G Fund rate at the time of loan issuance, which is generally lower than rates offered by traditional lenders. There are also fees associated with TSP loans.
TSP loan repayments are made automatically through payroll deductions. You pay monthly until the loan is repaid. Repayments include the interest payments.
TSP Loan Program Benefits
There are three primary benefits to taking a TSP loan, versus other options you may have.
- First, you may have an easier time getting a TSP loan. Since TSP loans are backed by the participant’s own account balance, there is no credit check. Once a TSP loan is approved, funds can be received within a few days.
- Second, a TSP loan may have a lower interest rate than other loan products. The interest rate on TSP loans is tied to the G Fund rate. Furthermore, the interest paid goes back into the borrower’s TSP account, essentially allowing participants to "pay themselves," rather than a bank or lender.
- Third, repayment through payroll deduction reduces the risk of missed payments. This ensures that you don’t negatively impact your credit report.
TSP Loan Program Drawbacks
As you can see, the TSP loan program seems relatively good. However, it’s not without drawbacks.
- Most importantly, borrowing from your TSP reduces the amount of money in the account. This decreases the account growth. The longer the loan term, the larger the impact on your overall account balance.
- If you fail to repay the loan after leaving military service, it may be considered a taxable distribution. This can create a tax liability, and you may be subject to early withdrawal penalties.
- Loan repayments limit your financial flexibility into the future. This may affect debt repayment, lifestyle choices and additional savings.
Related: 5 Reasons for Service Members to Avoid Borrowing from Their TSP Accounts
Alternatives to TSP Loans
If you find yourself in a financial bind, be sure to explore all your options before deciding on a TSP loan. Financial counseling is available through the Personal Financial Counselor program on base or through Military OneSource. Depending on the situation, you may be eligible for an interest-free loan from your branch aid society, including the Navy-Marine Corps Relief Society, Air Force Aid Society, Coast Guard Mutual Assistance or Army Emergency Relief.
The TSP loan program offers a convenient, low-interest borrowing option, but participants should carefully weigh the potential long-term impact on their retirement savings. Exploring alternatives, where possible, can help minimize these downsides and preserve the TSP's role in building a secure financial future.
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