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What is Co-Managed Care for Veterans?

Borrowing From Your Thrift Savings Plan – Is it a Good Idea?


Many federal employees take advantage of the tax-free loan provisions of their Thrift Savings Plan to borrow money for a variety of reasons – and one very common reason is to put a down payment on a house. Is this a good idea?

Well, it can be a good move – interest rates on TSP loans are generally very favorable, compared to other sources of credit, such as bank loans and credit cards, most of the time. But as a veteran or member of the military, you fall into a different category from the typical garden-variety federal employee who has never served in the military. Specifically, as an honorably discharged veteran, you should qualify for a VA home loan, provided you have decent credit and an acceptable debt to income ratio.

How TSP Loans Work

Let’s take a look at the mechanics of the program: When you contribute to the TSP, Uncle Sam takes the money and sticks it in an account on your behalf before the money hits your paycheck. That means you haven’t paid taxes on the money yet, though you can see the accounting for it on your leave and earnings statement (LES). This is important to understand later.

Money in a TSP account grows tax-deferred. Normally, outside of a retirement account, you would have to pay income tax on interest, dividend income tax on dividends you receive from stocks, and capital gains tax on any profitable sales of assets. But none of that matters in your TSP. The account grows and grows until you take the money out – usually in retirement, at which time you have to pay the income tax rates then in effect, when you actually draw the money from your TSP account.

But you can borrow against your balance without taking the money out – technically. You are just taking out a loan, secured by the remainder of your TSP balance, and accepting the obligation to pay yourself back – with interest. The government will take the repayment amount directly from your paycheck, though. If you want to pay off the loan, just call the TSP for a payoff amount at any time, and send them a cashier’s check in the mail, or do an electronic transfer.

You only have a limited amount of time to pay back the loan, though. Any balances you keep as distributions – and you will pay income tax. Remember how you didn’t pay income tax when you put the money in? Well, there’s no such thing as a free ride: You have to pay income taxes when you take the money out. Furthermore, if you are under age 59½ you will generally have to cough up a 10 percent additional penalty on the money.

The TSP administrators recognize two kinds of loans: Loans for a personal residence, which require documentation and which you can take up to 15 years to repay, on one hand, and general purpose loans. These loans don’t require documentation, but you must repay them within five years. In both cases, you have to start paying off the loan within 60 days of borrowing the money.

If you want to calculate your expected loan payment on a TSP loan, you can use an online calculator.

Restrictions and Eligibility Requirements

  • Additionally, you must meet the following specific qualifications, per the Thrift Savings Plan itself:
  • You must be employed by the Federal Government or a member of the uniformed services.
  • You must be in pay status because repayments are set up as payroll deductions.
  • You can only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time.
  • You must have at least $1,000 of your own contributions and earnings in your TSP account (agency contributions and earnings cannot be borrowed).
  • You must not have repaid a TSP loan of the same type in full within the past 60 days. (If you have both a civilian TSP account and a uniformed services TSP account, the 60-day waiting period applies separately to each account.)
  • You must not have had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service.
  • You must not have a court order against your TSP account.

How Much Can I Borrow?

Again, per plan documents, you can borrow your own contributions and earnings on your own contributions and earnings on those contributions in the TSP account from which you intend to borrow, not including any outstanding loan balance;

You can borrow a maximum of 50% of your vested account balance (including any outstanding loan balance) or $10,000, whichever is greater, minus any outstanding loan balance; or

You can borrow up to $50,000, minus your highest outstanding loan balance, if any, during the last 12 months. Even if the loan is currently paid in full, it will still be considered in the calculation if it was open at any time during the last 12 months.

Costs and Fees

Expect to pay a fee of $50 per loan, which will be subtracted from the total borrowed amount. For example, if you want to borrow $10,000 from your TSP, you will receive a check for $9,950.

The interest rate you will pay for the life of the loan will be the same as the rate paid by the G-Fund, which is the government debt option in the thrift savings plan. This rate, over time, has averaged about 1.77 percent higher than the three-month T-bill rate. Which means you are essentially paying a very modest spread over short-term treasury bonds to take out a medium-term (five to fifteen years) loan. All told, if you’re going to borrow money, this is a pretty good deal, compared to what you will normally be able to get from banks.

Advantages of Using a TSP Loan

If you need the cash now, and you are relatively confident you are able to pay back the loan, then it may make better sense to take out a loan from the TSP and pay yourself back, for several reasons:

  • You’re paying interest to yourself, instead of to a bank. So in the long run, the loan is free to you, other than a small administrative charge.
  • You avoid the 10 percent penalty on early withdrawals from retirement accounts. If you weren’t old enough, or haven’t separated from federal service, you would have to pay this penalty if you withdrew the money outright.
  • Interest rates are competitive.
  • If you are putting money down on a non-VA home loan, the loan can help you avoid primary mortgage insurance, or PMI. This is insurance you pay to protect the bank – not you – when your equity in the home is less than 20 percent.
  • No worries about qualifying. You can make this happen just by filling out some paperwork.

Considerations for Military Families and Veterans

For military members and veterans who are buying houses under the VA home mortgage program, there are some special factors that come into play:

  • You don’t need a down payment on a personal residence. You can buy your home with a VA loan with no down payment whatsoever.
  • You don’t have to pay PMI on a VA loan, even if you have no down payment and no equity in the home. The federal government guarantees the loan in case you default, meaning there’s no reason for the lender to insist on PMI.
  • If you are a federal civilian employee, under the FERS system, and your loan payments mean you can’t contribute 5 percent or more of your pay to the TSP, you won’t get the full agency match on your money.
  • Although the interest rate is low, small loans for short periods of time are still expensive, because of the $50 flat fee on each loan.
  • If you have a Roth account in your TSP, the government will prorate the amount you borrow from both accounts.
  • Your spouse must generally sign off to approve a loan from your TSP, except for CSRS civilian employees. In this case, your spouse will simply receive a notification.
  • If you have access both to a civilian 401(k) plan and the TSP, and you want to be able to borrow from it, lean towards the TSP. Not all 401(k) plans allow for loans, and the allowable repayment period for residential loans is much longer for the TSP than it is for 401(k) loans.

Disadvantages of Borrowing From Your TSP

There are some reasons why you might not want to borrow from your TSP, even if you have the option.

  • When you borrow your pre-tax dollars from your TSP, you have to pay yourself back with after-tax dollars. This means to pay back $100, you may actually have to earn $128 or so.
  • When you borrow money out of a TSP or 401(k), you are essentially “unplugging” a tax-advantaged asset. You’re giving up everything that tax-deferred investment was ever going to earn (until you pay it back), and you’re trading it for another asset that may not have the same tax advantages. (If you’re buying a personal residence, though, it usually works out to be a wash, since your personal residence grows tax-deferred and the first $250,000 in capital gains are exempt from capital gains. If you’re married, you get a $500,000 exemption.)
  • You might want to leave federal service.

How to Apply for a TSP Loan

The simplest way to apply for a TSP loan is electronically, via www.tsp.gov. To apply, log into the secure My Account section using your 13-digit TSP account number (or customized Web user ID) and your TSP Web password. Depending upon your retirement system coverage (FERS, CSRS, or uniformed services), marital status, type of loan, and how you want to receive the loan payment (by check or direct deposit), you will either be able to complete the process online, or you will be instructed to print out the partially completed Loan Agreement, complete the form, and mail or fax it to the TSP (with any additional required information). The TSP must receive the Loan Agreement before the expiration date at the top of the agreement.

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