Saving for retirement

Nelson Mandela once said, “The greatest glory in living lies not in never falling, but in rising every time we fall.” 

I was recently impressed by a young couple who wrote to me about the predicament that they found themselves in and how they plan to move forward. They reached out for options and even though the options were not what they hoped for, they continued with a plan to move forward. Isn’t that what we should do when facing problems? Look for the best solution and then work within the available options to solve the issue.  

I am always impressed to see federal workers making smart retirement planning decisions at a young age so that they can set themselves up for a comfortable life after retirement. Retirement planning is a lifelong learning affair and begins with the first day on the job and continues throughout your career and into your life after retirement. 

The Problem: 

My time in federal service started just before COVID which threw my wife and I for a loop as it did many others. In summary, the training I was obligated to complete to be promoted was suspended and resulted in a delayed career progression over three years. Things are finally starting to settle but my wife and I had to take two TSP loans out at different times to stay afloat.    

We have paid on these loans without issue, but now find our need for housing to be our most pressing. As we are only 29 and 27, we’ve wondered if there would be a way to have the loans canceled or transferred to an early status. I spoke with a TSP representative who did not believe that would be possible. Ultimately, we wanted to consult with a retirement specialist to confirm. Are you aware, or might you have suggestions on how we can approach this situation? The sum of money in question would equate to approximately $12k. We elected a more aggressive payment schedule which equates to $650 per month of our take-home pay. The $650 would go a long way toward our housing needs.” 

My response: 

I'm so sorry to hear about your predicament. Here are references to the rules for paying back a TSP loan while employed. Unfortunately, you are obligated to pay back the loan while employed. 

TSP Loans 

• Failing to make loan payments in accordance with your Loan Promissory Note can have serious financial consequences, especially if you’re still working or subject to an early withdrawal penalty tax. You are responsible for ensuring that the loan payments are correct and submitted on time regardless of whether your agency or service missed your loan payment. 
• If your loan becomes delinquent, any taxable portion of the outstanding balance and accrued interest will be treated as taxable income by the IRS. If you’re under age 59½, you may have to pay an additional early withdrawal penalty tax. See “Early Withdrawal Penalty Tax” in the booklet Tax Rules about TSP Payments (204kb) for more information and exceptions. 
• If you’re an active federal employee or member of the uniformed services when your loan becomes delinquent, your loan becomes a “taxed loan.” A taxed loan permanently reduces your TSP account unless you pay it off. Having a taxed loan that you have not repaid will cause your final account balance at retirement to be less than it otherwise would have been. If not paid off, a taxed loan will also affect your eligibility for another loan. It counts as one of two loans you’re allowed per account, and it is treated as an outstanding loan balance when calculating your maximum loan amount. You may repay a taxed loan up until the time you separate from federal service. 
• If you are separated from federal service when your loan becomes delinquent, your loan is foreclosed, and the IRS treats the outstanding balance and accrued interest the same as if you had taken that money as a distribution. Separated participants may not repay a foreclosed loan. 

TSP Loans:  Summary of Changes 

General purpose and primary residence loans continue to be available to you with some changes: 

• You can have two outstanding TSP loans, but only one primary residence loan, per account. That means you can have two general purpose loans for each account, or one general purpose loan and one primary residence loan. 

The maximum amount you can borrow is the smallest of the following: 

• Your own contributions and earnings on those contributions in the TSP account you’d like to borrow from, not including any outstanding loan balance; 
• 50% of the portion of your total account balance that is made up of your own contributions and earnings on those contributions (including any outstanding loan balance) or $10,000, whichever is greater, minus any outstanding loan balance; or 
• $50,000 minus your highest outstanding loan balance, if any, during the last 12 months. 

Loan details: 

• The loan fee for a primary residence loan is $100.  
• The loan fee for a general-purpose loan is still $50.   
• The loan repayment period for a primary residence loan is 61 – 180 months.  
• You can use direct debit for non-payroll loan payments. 
• If you leave federal service with an outstanding loan, you can continue to make loan payments by check, money order, or direct debit.  
• You cannot apply for a new loan after you leave federal service. 
• You can request a loan even if you have a taxed loan, but a taxed loan that you haven’t paid off counts as an outstanding loan toward the limit of two per account. 
• You cannot voluntarily re-amortize—change the term and payment amount of—your loan. Your loan payment amounts only change if there’s a change in your payroll schedule or following the suspension of loan payments during a period of non-pay status. 
• Always remember to consider carefully the potential effect that a TSP loan may have on your retirement income. 

TSP Loans / Book 4 

• Regularly scheduled loan payments from participants currently in federal service are made through payroll deductions. (See Separated Participants on pages 10 – 11 for loan payments after you’ve left service.)  
• When your loan is disbursed, we will notify your payroll office immediately to begin deducting loan payments from your salary each pay period no matter what pay cycle you’re on.  This is true of both general-purpose loans and primary residence loans.  
• We do not have access to your payroll records and cannot stop, start, or change loan payments. That can only be done by your payroll office.  
• Loan payments can start the first pay date after your payroll office receives the notification but must start within 60 days of disbursement.  
• Check your leave and earnings statement to be sure that loan payments have started and that they are in the correct amount. 
• You cannot stop your loan payments. When you agree to the loan terms, you agree to repay the loan in full, and you authorize payroll deductions. (You may also have authorized direct debits from your bank if you separated from federal service or went into nonpay status with an outstanding loan balance.) If you go into nonpay status, please see Appendix I, “How Nonpay Status Affects Your TSP Account.” 

Although I couldn’t find a way to provide relief to help this couple lessen the burden of their loan payments, I was impressed with the response they gave that showed that they would not be defeated, but only needed to find another solution to their predicament! 

Response: 

Thank you so much for your assistance and for finding this information for me! This was helpful to see, and it gave my wife and I an answer! We will be working diligently to ensure these loans get paid off and paid off properly. 

Given the current need for housing I do not believe we are in a position to currently do too much with my retirement beyond paying the loans and investing at my employer’s 5% match rate. Though young, I want to ensure I take the steps to learn and make the decisions that will best set my wife and I up for success later. Big thanks for taking your time to explain all this and for helping me understand. Have a wonderful day, and I look forward to talking with you soon! 

In 2023, there were more than 400,000 general purpose loans outstanding valued at close to $5 billion. This was in addition to a much smaller number of residential loans outstanding in 2023 (approximately 4,000 valued at well under $200 million).  While there are advantages to a TSP loan that include: 

• A loan allows you to avoid paying the taxes and penalties that come with taking an in-service hardship withdrawal.  
• The interest you pay on the loan will go back into your retirement account, although on a post-tax basis. 
• TSP loans also won’t require a credit check or be listed as debt on your credit report.  

The disadvantages should also be carefully considered: 

• While your money is out “on loan”, it is not being invested to grow and compound.  
• For some employees, it is difficult to continue to contribute to the TSP while making loan payments which may mean sacrificing agency matching contributions.   
• If you leave federal service and you allow the loan to be foreclosed, you will accept any taxable portion of the outstanding balance and accrued interest as taxable income.  If you are under age 55 when you separate, you will incur a 10 percent early withdrawal penalty on top of the income tax due, unless you meet one of the exceptions found on page 3 of the TSP Booklet, Tax Rules about TSP Payments.