Borrowing against a thrift savings plan is a simple way for civil service and military personnel to raise extra money for emergencies. The main advantage of a TSP loan is that you don’t need a good credit score to get the loan, and if you default on the repayment your credit is not affected. You will have other repercussions, however, so consider the benefits and advantages before initiating the loan.
It’s Your Money
Technically, when you borrow from your TSP you are using your own money. Instead of money loaned to you by an institution, you are borrowing against the savings you have built up in the TSP. To take the minimum loan amount of $1,000, your TSP account must contain at least that much in contributions and earnings. Agency contributions may not be borrowed, so the only funds available from which to borrow are those you have paid in or the interest earned on the investment.
You don’t need a credit check or a good credit score for a TSP loan, because the loan isn’t credit. The only criteria for the loan is that you must be in active-pay status to be eligible to borrow against the account, and the loan must be for the purchase of a primary home or for general purposes. The purchase of a second home does not qualify for a TSP loan. In addition, the loan must be for an amount between $1,000 and $50,000, and the account must contain sufficient funds to cover it.
Defaulting on the Loan
You are required to pay back a TSP loan with interest, but you are paying both the installment and the interest to yourself. If you are unable to repay the loan, your credit is not affected. You risk paying additional taxes, however, because an unpaid TSP loan represents income that has not been taxed, and therefore you will be taxed on the amount of the loan. The loan is meant to be repaid with after-tax income, so you would pay taxes twice if you default – once on the income you use to repay it, and again on the value of the loan.
TSP loans repaid on time will not affect your retirement income negatively. If you default, however, although your credit score is not affected you can incur other disadvantages that may affect your financial position. For example, if you are younger than 59 1/2 years old at the time of your default, you will attract an early withdrawal penalty of 10 percent, which will reduce the value of your investment. Your remaining value in the TSP account is also lower than it was before you took out the loan. Unless you contribute extra to make up the difference, your final TSP value at retirement will be less than if you had repaid it.
Tracey Sandilands has written professionally since 1990, covering business, home ownership and pets. She holds a professional business management qualification, a bachelor's degree in communications and a diploma in public relations and journalism. Sandilands is the former editor of an international property news portal and an experienced dog breeder and trainer.