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What Not To Do With Your TSP Account

Be careful about borrowing from your retirement investments. 

If you’re covered under the Federal Employees Retirement System, investing as much of your salary as you can afford in the Thrift Savings Plan is essential to ensuring a comfortable retirement. And it’s not only important to get your money into the TSP, but to keep it there.

At the end of last year, there were more than a quarter of a million outstanding TSP loans, totaling about $4.5 billion. When you borrow from your TSP, the money comes out of your account balance in proportional amounts from traditional and Roth investments. For example, if 80% of your account is in your traditional balance and 20% is in your Roth balance, then 80% of the amount you borrow will be from your traditional balance and 20% will be from your Roth.

You’ll be paying the loan back to yourself with interest (computed at the G Fund rate when the loan is approved). But by temporarily taking money out of your account, you’ll miss out on some of the compound earnings you could otherwise have accrued.

You must start repaying your TSP loan with interest within 60 days of when it is disbursed to you. Your payroll office will begin deducting loan payments from your salary each pay period. Be sure that these payments won’t cause you to reduce your new contributions and drop you below the 5% required contribution in order to receive the full agency match. 

Here are a few other important facts about TSP loans:

  • You’ll pay a one-time fee of $50 for a general purpose loan or $100 fee for a primary residence loan. 
  • As of June 1, 2022, loans may only be reamortized to a longer or shorter payment period if you have transferred to an agency with a different pay cycle. 
  • You can make loan payments in addition to payroll deduction to pay off your loan more quickly or to make up for missed payments. This can be done by direct debit a maximum of two times per month or by check or money order at any time. 
  • A direct deposit account or mailing address must be added to your account at least seven days (not including weekends and holidays) before you submit a loan request.
  • When applying for a TSP loan, you should confirm your marital status. If you’re divorced, you should contact the TSP ThriftLine to update your status to single. A spousal signature is required if your TSP account information still shows your status as married.
  • If you have an outstanding loan when you separate from federal service, you have three options: First, you can pay the loan off. Or you can keep the loan active by setting up monthly payments by check, money order or direct debit. The terms of the loan do not change when you separate, and the maximum time limit for paying off your loan still applies. Finally, you can allow the loan to be foreclosed and accept any taxable portion of the outstanding balance and accrued interest as taxable income.

You can’t take a new loan after you leave the government. Before you decide to apply for a TSP loan, be sure to carefully read the TSP booklet on loans

While we’re on the subject of the TSP, here are some additional things to know:

  • Although the full dollar amount of your contributions to a traditional, pre-tax TSP account goes into your account, your net income may not go down by the same amount. This is because your contributions reduce your taxable income. It’s possible your federal and state tax withholding will go down when your TSP contributions go up.
  • If you expect to be paying a higher tax rate in retirement than you are today (due to higher income later in life or changes in the tax laws), you might want to make  after-tax contributions to a Roth TSP account. These contributions will not lower your current tax bill, but will provide you with some tax-free income later in life.
  • To make changes to your TSP contributions, contact your agency payroll provider.
  • All of the agency matching money placed in your account is immediately vested. This means it belongs to you even if you leave federal service before becoming eligible for a FERS retirement. The 1% automatic agency contribution will be yours once you have completed three years of service. 
  • Employees hired on or after Oct. 1, 2020 were automatically enrolled in the TSP at the 5% contribution amount. 
  • The maximum TSP contribution amount for 2023 is $22,500 for employees who are under age 50, and $30,000 for those who will reach age 50 in 2023 or above.