TSP Loan Advantages and Disadvantages
By Wayne Sutton
The Thrift Savings Plan is one of the principal means by which workers under the Federal Employees Retirement System save for post-retirement. This system operates in a similar way to the 401(k) provided via private investment firms and employers. Federal workers also employ avenues like pension and social security to prepare for retirement.
Federal employees are expected to keep their money in the system until retirement because the Thrift Savings Plan was created to help them earn an investment income for retirement life.
The only exception is perhaps the United States Office of Personnel Management, which permits federal employees to withdraw their savings before they retire in line with provisions of the plan. The Personnel Management Office (OPM) runs the Thrift Savings Plan.
Workers can withdraw their savings from the Thrift Savings Plan via a loan.
There are two forms of Loans for the TSP:
- Loans for buying or erecting a primary residence
- Loans for general purpose
Although there are pros and cons of getting a Thrift Savings Plan Loan, the negatives may be significantly higher than the benefits. The disadvantages are so much that OPM encourages federal workers to only borrow from the Thrift Savings Plan after trying out all other loan options.
Pros and Cons of the TSP Loan
The Interest Rate is Low: A Thrift Savings Plan loan has an interest rate similar to that of the return on the G Fund, which is one of the options backed up by government securities, provided for investment in the Thrift Savings Plan. These funds (G Fund and others under the Thrift Savings Plan) are employed to provide the investment mixes for target-date monies offered to those who are part of the plan. Typically, the rate of return of the G Fund is lower than 2.0%.
A Broad Range of Permitted Loan Amounts: As long as you have saved up to that amount in your account, you are free to borrow between $1000 and $50,000. You can choose to use a loan calculator to determine the size of your loan payment.
Payroll Deductions are Used for Repayment: Regarding processing, it is easy to repay Thrift Savings loans as they are made via payroll deductions.
Opportunity for Anytime Additional Payment: There is a loan repayment coupon on the website of the plan for any participant who intends to make further payment. With this ticket, you can be sure that your payment reflects on your loan. You also have the chance to pay off the loan early if you can clear off the new principle in your loan’s early years. Alternatively, you can break your payments down into smaller amounts via re-amortization.
Compulsory Processing Fee: Every loan has an attached $50 processing fee at the point of application. Typically, a deduction is made from the amount you get as a loan.
Forfeiting Earnings: This is perhaps the biggest disadvantage of receiving a loan from the TSP because you are technically withdrawing from your future in the name of borrowing from the plan. You are more or less saying goodbye to the investment growth which would have accrued on your account. To make it worse, you are also obliged to repay the amount with interest.
Maximum of 90-day Grace Period after Leaving Federal Service: If you retire from federal civil service when you still have a balance to settle with the Thrift Savings Loan Plan, you are obliged to pay it back in 90 days. Failure to do so would lead to the stated, outstanding amount being tagged as income via a report to the Internal Revenue Service.
Short-term Loans: The time attached to the loans is usually short in a relative sense. There is a maximum period of 5 years allowed for general purpose loans to be repaid. As for residential loans, they have to be settled within 15 years.
It is recommended for you to reach out to a financial advisor for advice before making any decisions regarding your TSP.
Contact Wayne Sutton
CA Lic # 0805035
Office: 707-257-0408 office
Cell: 707-337-0489 cell
Email: [email protected]
2015 Redwood Road, Suite 6
Napa, CA 94558