Considering a TSP Loan: The Pros, Cons, and What Happens If You Leave Federal Service
If you’re a federal employee or service member, you may look at your Thrift Savings Plan (TSP) and think, “That’s my money…can’t I borrow from it if I need to?”
The short answer is: yes, you can. But before you turn your retirement fund into an emergency fund, it’s worth understanding exactly how a TSP loan works and what happens if you leave federal service before you pay it off.
How Borrowing From Your TSP Works
The Thrift Savings Plan is a retirement savings and investment program designed for federal employees and members of the uniformed services. It provides similar tax advantages and savings opportunities to programs offered by private-sector 401(k) plans.
A TSP loan means you borrow from yourself. You take money from your retirement savings, use it now, and pay yourself back—with interest—over time. You can only take a TSP loan while you’re actively employed in federal service; once you separate, you cannot take out a new loan.
Here’s the upside:
- There’s no credit check.
- You’re paying interest back into your own account, not to a bank.
- You can usually access funds more quickly than through traditional loans.
There are two types of TSP loans:
- General purpose loan: for expenses like home repairs, debt payoff, and unexpected bills. You have up to five years to repay it.
- Primary residence loan: for buying or building your main home. You can stretch repayment up to 15 years.
You’ll pay a small processing fee ($50 for a general purpose loan and $100 for a primary residence loan). The interest rate is tied to the TSP’s G Fund (Government Securities Investment Fund) when you take out the loan.
The TSP office will notify your payroll office immediately so that it begins deducting loan payments from your salary each pay period. Once you start repayment, it’s automatically deducted from your paycheck, so it’s a straightforward and easy way to make payments.
Should You Use Your TSP As An Emergency Fund?
In short: only as a last resort.
Your TSP is designed to grow for decades, not to serve as your backup checking account. For some, there might be a situation when a TSP loan makes sense.
Before taking out a loan, ask yourself:
- Can I handle this expense another way, like through savings or a short-term personal loan?
- How stable is my job right now?
- What will this do to my future retirement balance?
And if you do take a loan, make a plan for paying it off quickly. The sooner you repay it, the less growth you miss out on.
The Real Risk: What Happens If You Leave Federal Service
If you separate from federal service by choice, retirement, or layoff and you still owe on your TSP loan, your payroll deductions stop. However, you have three options to manage your loan:
- Pay off the loan in full by the required deadline.
- Set up monthly payments by check, money order, or recurring direct debits.
Let the loan go into default and report the remaining balance, including any accrued interest, as taxable income.
If you don’t keep up those payments, the TSP will declare your loan in “default.” Depending upon your age, you may also owe a 10% early withdrawal penalty. The taxable income from a defaulted loan is reported on a Form 1099-R. You can’t “undo” it later by sending the money back.
Imagine taking out a $20,000 loan. Then you leave your job and don’t repay it. Suddenly, that $20,000 is added to your taxable income for the year and possibly penalized. It’s a double hit: higher taxes and less money in your retirement account.
If there’s any chance you’ll leave your job soon, you should carefully consider whether taking out a TSP loan is your best move.
The Bottom Line
Your TSP is one of your most powerful tools for retirement. It’s your future income, compounding behind the scenes.
You can consider a TSP loan, but every loan has trade-offs. Understanding how it works and creating a smart repayment plan will help you make a smart decision without derailing your retirement.
District Financial Planning and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
