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Military Finances 201: TSP Loans Thumbnail

Military Finances 201: TSP Loans

Retirement Funding TSP

There are a lot of different financial tools out there. Some are good, some aren't. Occasionally, a not so good tool is the only tool available. When that is the case, you need to understand the tool. That is the tool box I would put TSP loans into. Not a great tool, but occasionally it might be the only option, so you need to understand it. Here we go...

Who Can Take Out a TSP Loan?

First of all, you need to be employed by the Federal government (civilian or military). You need to be in pay status (so loan payments can be deducted from your pay). And you need to have at least $1,000 of your contributions and earnings in your account (excluding funds in the TSP mutual fund window).

Generally speaking, if you are married, your spouse must consent to the loan.

What are the Terms of a TSP Loan?

If you take out a general purpose loan, the repayment period is a minimum of 12 months and maximum of 60 months. There is no documentation required.

You can also take out a primary residence loan. In this case, the repayment period is between 61 and 180 months. You'll also need to provide supporting documentation showing the costs associated with the primary residence. Generally, this loan can only be used to close the purchase (down payment or settlement fees) of a primary residence. You can't use it for refinancing an existing loan or prepaying an existing mortgage. It also can't be used for repairs or buying out a co-owner.

How Much Can I Borrow from TSP?

There are three tests, and you must take the lowest amount from the result of those tests. The test are:

  1.  The total of your own contributions and earnings on those contributions (remember mutual fund window amounts don't count) minus any outstanding loan balance
  2.  50% of your own contributions and earnings Including outstanding loan balances (in this case) or $10,000, whichever is greater
  3. $50,000 minus you highest outstanding loan balance, if any, during the last 12 months, even if the loan is paid off.

How Much Interest Do I Pay on a TSP Loan?

You'll pay the same interest rate the G Fund paid for the prior month

How Do I Repay a TSP Loan?

Your payments will be deducted through payroll deductions. They must start within 60 days of receiving the funds. You can't stop these payments.

You can elect to make additional payments or pay the loan off by check, money order or direct debit.

What Happens if I Don't Make TSP Loan Payments?

If your loan is delinquent (two or more missed loan payments or you go past the maximum term limit listed above), your loan is deemed a distribution and is taxable and subject to penalty if you are younger than 59 1/2.

What Happens if I Leave the Military with an Outstanding TSP Loan?

Fortunately, you can continue to make payments per your loan terms (this isn't always the case for civilian 401(k) plan). But since you're no longer in pay status, you'll need to make payments by check, money order, or direct debit. If the loan goes into foreclosure, the outstanding balance will be treated as a distribution and will be subject to tax and penalty.

If you pass away with a TSP loan, it goes into foreclosure and is taxable to your estate.

Military Finances are Different

The TSP has different rules than a 401(k) (see above). This isn't the only way your finances are different than a civilian. That's why we think that Active and Retired Senior Military Officers and NCO should work with a Financial Planner or Advisor that deals with your unique issue each and every day. If you'd like to find out how we work with people just like you, use the button below to schedule a free initial consultation. 

If you found this article useful, you might like the following blog posts:

Retired Military Finances 201: TSP Annuities


Watch Out for this TSP Tax Trap


I'm About to Retire From the Military. What Should I Do With My TSP?


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