TSP Loans & Withdrawals

The short version

Your Thrift Savings Plan (TSP) is built for retirement, but it has an emergency exit: while you are still serving, you can borrow from it or, in limited cases, withdraw from it. Both reduce what your retirement is doing for you, so they are tools of last resort, not first.

Know the difference between a TSP loan (you pay yourself back) and an in-service withdrawal (you do not, and it may be taxed and penalized).

TSP loans: borrowing from yourself

A TSP loan lets you borrow your own contributions and earnings and repay them, with interest, back into your account through payroll. There are two types: a general purpose loan (repaid over 1 to 5 years) and a primary residence loan (up to 15 years).

How TSP loans work

• Borrow $1,000 up to $50,000 (minus your highest balance in the last year).
• General purpose: 1 to 5 years, no documentation.
• Residential: up to 15 years, documentation required.
• You repay yourself with interest via payroll.

The real cost

• The borrowed money stops growing in the market while it is out.
• Miss payments after you separate and it becomes a taxed, penalized distribution.
• You must be in pay status to take one.

A TSP loan is not free money. The biggest cost is the market growth your borrowed dollars miss while they sit on the sidelines.

Source: TSP.gov

In-service withdrawals: harder to undo

While serving, you can take an in-service withdrawal in two situations: a financial hardship withdrawal, or an age-59½ withdrawal once you reach that age. Unlike a loan, you do not pay this back, and it permanently reduces your balance. A hardship or pre-59½ withdrawal is generally taxed and may carry a 10% early-withdrawal penalty.

When it makes sense, and when it does not

A TSP loan can beat a payday loan or a high-interest credit card in a true emergency, because you repay yourself. But raiding retirement to fund a want, not a need, is how people arrive at separation with far less than they planned. Exhaust cheaper options first: your emergency fund, a Military Aid Society grant or zero-interest loan, or a financial counselor.

Try these first

• Your emergency fund.
• A Military Aid Society grant or interest-free loan.
• A free financial counselor via Military OneSource.

Borrowing from retirement should sit behind your emergency fund and the military aid societies, not ahead of them.

Source: TSP.gov; Military OneSource

Do this now

1. Price the alternatives first: emergency fund, aid society, counselor.
2. If you borrow, choose the shortest term you can afford.
3. Have a payoff plan before you separate so the loan never becomes a taxable distribution.
4. Keep contributing at least enough to get the full match.

FAQ

How much can I borrow?

Between $1,000 and $50,000, limited by your own contributions and earnings and reduced by your highest outstanding loan balance in the last 12 months.

Is a TSP loan taxed?

Not if you repay it on schedule. If you leave service with an unpaid balance and do not repay it, it can become a taxable, possibly penalized distribution.

What is an age-59½ withdrawal?

Once you are 59½, you can take in-service withdrawals from your TSP, subject to limits and taxes. Before 59½, only a financial hardship withdrawal is available in-service.

Does borrowing stop my contributions?

No, but the dollars you borrowed are out of the market until repaid, so keep contributing to get your full match.

Sources & links

• TSP, Loans: tsp.gov
• TSP, In-service withdrawal basics: tsp.gov
• Military OneSource, free financial counseling: militaryonesource.mil