BUDDY NIDEY – When you need money, and you have a Thrift Savings Plan; you can take out a TSP loan to help you out in those tough times. Many employer-sponsored defined contribution plans let you take out loans – either for a primary residence or general purpose. In some cases, it can be for both.
There is one key restriction in getting a loan from the TSP – you may not borrow any more than $50,000 even if you have much more money in it. If your TSP balance is less than $100,000, you can only borrow half of what is in the account. So, if you have $70,000 in your account, you are eligible to take out $35,000. If you have $50,000, you can only request a $25,000 loan.
- General Purpose Loan– This loan can be used for whatever you need it for. There is no need for documentation to prove what it’s used for and can be repaid up to five years.
- Primary Residence Loan –Asking for this loan generally prove of what you’ll be using it for but can be paid back within 15 days. You can check out https://www.tsp.gov/forms/loans.htmlto find out what the specific documentation requirements are. A primary residence loan does extend to houseboats and RVs, so long as you’re using them for your main residence.
2 Requirements Of Either Loan Type
Whether you’re getting a primary residence loan or a general purpose one, there are two key requirements you must fulfill on them. If your TSP plan is funded under the FERS retirement system, you need your spouse’s consent. You’ll also need to pay a $50 application fees, which are used to dray the TSP expenses. You cannot apply for a second loan of the same type within two months (60 days) of paying the other loan off.
When taking out the TSP loan, the TSP account is reduced to the amount you borrowed. So, if you put money evenly in all five TSP funds and you’re borrowing $25,000, $5,000 would be deducted from all funds. The amount of interest you pay back is based on the G Fund return in the month the loan is granted. You can find this information on the TSP website under “loan and annuity rates.” The interest paid returns to the TSP account based on the most recent contribution allocation.
The loan and repayment need to be comparative between the balances of your Roth TSP and the traditional TSP.
What Does The Thrift Board Say About TSP Loans
According to the Thrift Board, it’s never a good idea to take out a TSP loan, as people are borrowing from their retirement and may not be fully available at retirement. Their assumption is based on many TSP participants making investments in stock funds (C, I and S) where the return tends to be more than the G fund. There are exceptions here – 2008 and 2015, for instance.
If you’re paying on loan and leave federal service (for whatever reason), you are given two choices:
- Pay the loan back
- Take a taxable distribution
The TSP will be given notice that you are leaving the agency (usually 30 days) and will send you instructions on how to repay the loan. The notice informs you of the date the loan must be repaid by.
Failure to repay the loan by that date means the loan goes into default and the remaining balance is considered taxable distribution. The TSP sends you an IRS Form 1099. The tax can be avoided paying if you transfer an equal amount of the remaining balance into an IRA or another tax-deferred account.
You cannot take out any money from the account until the outstanding loan is closed. If you don’t plan to pay the loan back, it’s imperative to contact the TSP and make a request for immediate determination of distribution.
As Certified Public Accountant and a graduate of the College of Financial Planning in Denver, Colorado, Buddy “Bud” Nidey applies his strong analytical background to his work as an investment advisor representative. He enjoys coordinating clients’ investment portfolios with solid financial planning that takes income taxes, diversification and safety into consideration.
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