The board that manages the Thrift Savings Plan wants federal employees who tap their TSP accounts for loans to know the score.
The Federal Retirement Thrift Investment Board put together a three-minute public service announcement on YouTube to educate enrollees on the risks of borrowing against their retirement funds.
Here’s what happens when employees take out a TSP loan:
- They are borrowing from their own contributions and the earnings on those contributions. Employees are not able to borrow from any agency contributions or the earnings on those contributions.
- There’s $50 loan fee deducted from the loan at the start. So, if an employee asks for a $2,000 loan, she gets a $1,950 loan.
- Payments plus interest are deducted from the employee’s pay check for the duration of the loan repayment period.
- Interest rates are the same as the government securities (G) Fund interest rate at the time the employee’s loan application is processed.
Employees who take out loans should know that they could miss out on hundreds or thousands of dollars in earnings by doing so, especially if repayments stretch over a long period of time. Most importantly, employees who fail to repay the loan according to their agreement, or who don’t pay it back when they leave the government, will owe income taxes on the remaining loan balance. And if they are under the age of 59.5, they could get hit with a tax penalty for early withdrawal. As the YouTube video warns, “Just make sure that before you take out a loan, you know what you are getting into, and what it’s costing you.”