The Cost of Taking a TSP Loan


Are you thinking about taking a TSP loan? If so, then you should know it might cost you more than you think. But first, let’s review how a TSP loan works.
When you take one, you are borrowing from your own contributions and the earnings on
those contributions. You are not able to borrow from any agency contributions or their earnings. Once approved, your loan amount is removed
from your TSP account. Your repayments, which are deducted from your pay, return the money
plus interest to your account. The interest rate that you pay is the same as the G Fund rate at the time your loan application is processed. Now for the costs. When you borrow from your TSP account, you
miss out on the earnings that you otherwise might have enjoyed had you not taken out the
money in the first place. And while it’s true that you’ll be paying yourself back with interest,
that interest will come from your hard-earned pay rather than from investment performance. If that interest turns out to be less
than what your money could have earned had it stayed in your account, you’ll have less
money saved even after you’ve repaid your loan. Think about it: This could cost you
hundreds or even thousands of dollars in retirement income—especially if your repayments stretch
over a long time period. Also, you’ll have to pay a loan fee. It’s
$50 and it’s deducted from your loan proceeds. So if you request a $2,000 loan, the amount
you’ll get is $1,950. Finally, if you fail to repay your loan in
accordance with your Loan Agreement or you do not repay it when you separate from service,
the TSP must report your unpaid amount to the IRS as a taxable distribution. This means
that your loan will be closed and you will owe income taxes on the taxable amount of
the remaining loan balance. If you are younger than 59½, this could be even more costly
because you also may be subject to an early withdrawal penalty tax. You can find out more about loans on our website and you can use our loan calculator in the
Planning & Tools section to estimate loan payments. Just make sure that before you take
a loan, you know what you’re getting into and what it’s costing you.

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