The Truth About TSP Loans | Do they Make Sense to Use?

The TSP Loan gets a lot of buzz, but it doesn’t always make sense because of the hidden costs. Here are some of my thoughts for when this makes sense and how to use it.
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My name is David Pere, I am an active duty Marine, and have realized that service members and the working class use the phrase “I don’t get paid enough” entirely too often. The reality is that most often our financial situation is self-inflicted. After having success with real estate investing, I started From Military to Millionaire to teach personal finance and real estate investing to service members and the working class. As a result, I have helped many of my readers increase their savings gap, and increase their chances of achieving financial freedom!
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As a federal employee, you may have heard about the TSP loans – a type of loan that allows you to borrow money from your Thrift Savings Plan account. While TSP loans may seem like a quick and easy way to access cash, they come with certain restrictions and drawbacks that you should be aware of before taking out a loan.

Firstly, it’s important to understand that TSP loans work differently than traditional loans. When you borrow money from your TSP account, you are technically borrowing from yourself. The amount you borrow, plus interest, is repaid back to your TSP account over time.

While this may seem advantageous, there are a few limitations to consider. For starters, the maximum amount you can borrow from your TSP account is the lesser of $50,000 or 50% of your vested balance. Additionally, you are limited to taking out only one loan at a time and are required to pay a $50 processing fee for each loan.

Another important consideration is the repayment term. TSP loans must be repaid within a set period of time according to a predetermined schedule. Failure to repay the loan could result in penalties, including taxes and additional fees.

Perhaps the biggest drawback of TSP loans is their potential impact on your retirement savings. When you borrow money from your TSP account, those funds are no longer invested and earning returns. This means that if the market does well while you have a TSP loan outstanding, you may miss out on potential gains.

Furthermore, if you are unable to make timely loan repayments, your outstanding balance will continue to accrue interest and fees, which will further erode your retirement savings. In some cases, borrowers may be forced to liquidate their TSP account balance to repay a defaulted loan, resulting in a permanent reduction of their retirement savings.

So, do TSP loans make sense to use? The answer largely depends on your individual financial situation and goals. If you have a pressing financial need and are confident in your ability to repay the loan, a TSP loan may be a viable option. However, it’s important to understand the potential risks and drawbacks associated with these loans, as well as the long-term impact they may have on your retirement savings. If you’re unsure whether a TSP loan is right for you, consider speaking with a financial advisor or tax professional for guidance tailored to your specific circumstances.