Your Thrift Savings Plan account is where you can save the easiest for your retirement. And for some federal employees, this account balance can be quite large. It may seem enticing to dip into this account if you’re in need of extra money or to put a down payment on a house.
First, we’ll look at the different loan programs available through TSP, then we’ll look at reasons you may now want to borrow from this account.
There are 2 types of loans available through the TSP; the residential and the general-purpose loan.
The residential loan is available to assist in putting together the required funds for a down payment or to help pay for closing costs on a home purchase. These loans can be paid back for up to a 15-year period and require documentation of the property.
A general-purpose loan can be paid back for up to 5 years. It can be used for any purpose and doesn’t require documentation. Payback is usually through payroll deduction.
Now, let’s look at why it’s not a good idea to take a TSP loan.
When you pay back your loan through payroll deduction, it’s important to know this is after-tax money. For every dollar you borrow, you essentially must earn that dollar plus your effective tax rate to satisfy your payment.
When you are ready to make withdrawals from your account after you retire, your money is taxed at ordinary income tax rates. There is no distinction between the money you previously paid back with after-tax funds. In essence, part of your TSP account will have been taxed twice because of your loan, once during repayment and once during withdrawal of funds.
If you take a loan, you will lose any gains that money would’ve generated had it remained in the TSP. TSP charges you the G Fund rate at the time of your loan, which remains fixed. You pay this rate back to yourself. You do sacrifice the earnings, even if money is invested in other funds other than the G Fund.
You run the risk of voluntarily reducing your regular TSP contributions. It may bring a financial hardship because you can’t afford your payments plus make contributions. This could have a significant effect on your ability to retire on time.
Be sure to understand all the consequences of borrowing against your TSP before you do because it could significantly reduce your retirement income.
If you want to learn more about how federal disability retirement can affect your TSP, or your ability to take a loan on your account, give us a call at 877-226-2723 or fill out this INQUIRY form. The consultation is always FREE.