Need fast cash? A TSP loan may be the answer

If you are facing early retirement or sudden loss of your federal career, it is a good idea to have a generous cushion of cash to carry you through a job search in the private sector or the wait you may need to endure to receive retirement income.  

With tens of thousands of other federal workers making a mass exodus from federal service, you won’t be alone, but it doesn’t make this situation any less unsettling. If you are worried that you aren’t prepared to be without a paycheck for a few weeks, or possibly a few months, a TSP loan may be the way to access cash.  

In 2024, there were close to 500,000 TSP general purpose loans outstanding. The TSP will continue its normal daily operations during a lgovernment shutdown. You do not need to take any action with your TSP. If you have a TSP loan and are an active participant (not separated from federal service or in a non-pay status for another reason), the TSP will automatically update your status to keep your loan in good standing, even if they do not receive repayments during the shutdown. 

Additionally, the lapse in appropriations does not prevent you from requesting a new TSP loan. The established eligibility requirements continue to apply. The TSP Loan Program booklet is an excellent resource to learn the eligibility requirements.  

Although a TSP loan should be considered a last resort, one advantage of a loan over a withdrawal is you don't pay ordinary income taxes or face potential tax penalties on the borrowed amount. You must repay the loan along with interest; but the good news is that your payments return money to your account — you're basically repaying yourself, but it is not without consequences. Remember that you cannot take a new loan after you separate from service. 

Another advantage of borrowing from your TSP account is the interest rate. Where can you borrow money today for 4.625%? This rate may be close to the rate for a home equity line of credit, but much lower than the rate to borrow on your credit card or other private lender where interest rates can be as high as 30% or more.   

If you are considering a home equity loan, there are some differences. A home equity loan is backed by your home rather than your retirement savings, so it might be a little less risky to borrow from the TSP. With a TSP loan, you can borrow up to the lesser of 50% of your contributions and the earnings on those contributions or $50,000 minus your highest outstanding loan balance, if any, during the last 12 months. Even if the loan is paid in full, it will still be considered in the calculation if it was open at any time during the last 12 months. 

With a home equity loan, you can generally borrow up to 80% of your home’s value minus your mortgage balance, depending on the lender. A home equity loan will require a credit check and can take weeks, if not months to access funds. 

There is no credit check with a TSP loan, and if eligible, the money can be in your bank account within days of your application being processed. There is a $50 fee to borrow from your TSP account, but with a home equity loan, you'll usually have to pay an origination fee as well as maintenance fees to access and maintain the loan with the interest paid to the loan provider. 

A home equity loan can generally be repaid over a period of five to 30 years, while your TSP general purpose loan must be repaid in full within five years. 

One big downside of a TSP loan is that it can significantly hinder the growth of your account.  

The interest rate for a TSP loan is locked in for the life of your loan and is based on the G Fund interest rate for the month before you request the loan. When you borrow from your TSP account, the loan is disbursed proportionally from any traditional (non-Roth) and Roth balances in your account. 

If you are a current federal employee, you may borrow from your TSP and repay the loan through payroll deduction. However, if you leave federal service (resign or retire), you may continue to make payments by direct debit, check or money order. The payment will be changed to a monthly schedule, if necessary; however, the maximum time limit for paying off your loan will still apply. You may also make payment in full by the required deadline. If your loan is foreclosed, any taxable portion of the outstanding balance and accrued interest will be considered taxable income.