Thrift Savings Plan Loan & Withdrawal Options

by | Nov 16, 2015

Last Updated March 6, 2024
A federal employee considering his Thrift Savings Plan and Federal Disability Retirement

The Thrift Savings Plan (TSP) is a retirement benefit for federal workers, which is comparable to the private sector’s 401(k), except with significantly lower annual costs. Although the TSP is primarily meant for financial contributions to grow untouched until retirement, there are some in-service loan and withdrawal options. These options may be especially pertinent to federal employees who are suffering from a disability and/or injury, and are overwhelmed with the resulting medical expenses.

In-Service Loans: Paying Interest to Yourself

Paying an excessive interest rate to a bank or credit card company can be intimidating, which is one of the key advantages for federal workers to take out loans through their TSP – the accruing interest is paid back into your TSP account.

How it Works

The TSP offers two types of loans: a residential loan (may only be used for the construction or purchase of a primary residence), and a general purpose loan, which can be used for anything. A federal employee must be on pay status to receive a TSP loan, and have a minimum of $1,000 in personal contributions (agency contributions cannot be borrowed) to apply for a loan. The maximum loan amount is $50,000; however, the maximum an employee can borrow depends on the individual’s TSP contributions and if they have any other outstanding TSP loans.

The TSP loan application is relatively straightforward. You can apply online through the “My Account” section on  the TSP website or you can print and fill out a Form TSP-20 and mail the completed application to the address listed on the form.

In-Service Withdrawal: Financial Hardship

The money withdrawn as a loan from a federal employee’s TSP account must be paid back, along with interest. In contrast, the money withdrawn as an  in-service withdrawal will be permanently depleted from the federal worker’s account, and the employee cannot contribute to his or her TSP account for six months after the money is withdrawn. For a financial hardship loan, the employee may be required to pay a 10 percent early withdrawal penalty tax. These costs of making an in-service withdrawal are significant, and should not be taken lightly. Remember that your Thrift Savings Plan account is meant as a way to save for your retirement, and an in-service withdrawal will permanently deplete the money from your account, along with any contributions you would otherwise add during the six months following the withdrawal. Any federal employee who is considering an in-service withdrawal should first see if they are eligible for an in-service loan. If they are ineligible, then the in-service withdrawal is the next option available.

How it Works

The Thrift Savings Plan offers two different types of in-service withdrawals. The first is an age-based withdrawal, for federal workers who are over the age of 59 ½, and the second is a financial hardship in-service withdrawal, which is reserved for federal employees who are struggling financially. To be eligible for a financial hardship TSP in-service loan, you must meet at least one of the following requirements:

  • Recurring negative monthly cash flow
  • Medical expenses (including household improvements needed for medical care) that you have not yet paid and that are not covered by insurance
  • Personal casualty loss(es) that you have not yet paid and that are not covered by insurance
  • Legal expenses (such as attorneys’ fees and court costs) that you have not yet paid for separation or divorce from your spouse

To help determine if you have a recurring negative cash flow, you can fill out the worksheet available with the Financial Withdrawal Request Form TSP-76. Although you will not be required to provide income documentation to validate your financial hardship, you should keep the information for your records, because you will have to certify on Form TSP-76 under penalty and perjury that you suffer from a significant financial hardship and the reason for the financial hardship.

Important Note: If you are a FERS employees, your spouse must consent to your Thrift Savings Plan loan or in-service withdrawal by signing a consent waiver. There are very few exceptions to this rule. Be sure to review the requirements listed in the Form TSP-20 if you are applying for a loan or Form TSP-76 if you are applying for an in-service financial hardship withdrawal. What should I choose?

Below is a table from the TSP website which outlines how both a TSP loan and in-service withdrawal would affect a federal employee’s account:

Loan In-Service Withdrawal
Cost to Participant
  • $50 loan fee
  • No earnings on any outstanding loan amount
  • Retirement savings permanently reduced by amount of withdrawal
  • No future earnings on amount withdrawn
  • With financial hardship withdrawal, no employee contributions for 6 months (and no matching contributions, if you are a FERS employee); members of the uniformed services cannot contribute from incentive, special, or bonus pay
Effect on Taxes
  • None (unless loan is not paid back and the TSP declares a taxable distribution*)
  • Immediate tax liability (unless age-based withdrawal is transferred to an IRA or eligible employer plan)
  • Possible additional 10% early withdrawal penalty tax
Effect on Earnings
  • No earnings on amount of loan until funds are repaid
  • No earnings on amount withdrawn
  • With financial hardship withdrawal, no new contributions to accrue earnings for 6 months
Effect on Matching Contributions (FERS Only)
  • None
  • With financial hardship withdrawal, no matching contributions while employee contributions are suspended

 

If you think you may qualify for federal disability retirement, and would like to speak with one of our case managers,  fill out our INQUIRY FORM for a free consultation.

Information on this blog does not involve the rendering of personalized investment advice. A professional advisor should be consulted before implementing any of the options presented. No content should be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

 

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