There are two types of TSP loans: General Purpose and Residential. In a bull market like the one we’ve experienced over the last 8 years, taking money out of your TSP could have proven very costly. It’s important to remember that although you’re being paid interest, rather than paying interest with a TSP loan, you may miss out on the investment gains that would have accrued in your account if the money had stayed invested. This is what makes it so advantageous in comparison to other methods of financing-repaying yourself is clearly a more favorable move than paying a bank. Fortunately, since you are borrowing the money from yourself, the interest on the loan is also being paid back into your account. Except with the TSP, you are also the bank. Taking a loan from the TSP is not much different than taking a loan from a bank. If for any reason you cannot repay the loan, the loan will then be treated as a distribution from your TSP, triggering taxes and potential penalties. Additionally, you must be sure of your ability to make the repayments on the loan. The criteria for what constitutes a useful withdrawal is of course highly personal, but it should generally be for productive, not consumptive, purposes. If you start to view your TSP as funds that can be used for current wants, rather than for future needs, financial trouble will be inevitable. The problem is that actual desires become blurred with fictitious wants when larger sums of money suddenly become available. Although I do maintain the opinion that your money (in a 401K or not) should always be used to maximize your personal utility throughout the entirety of life, it’s equally as important to keep your financial perspective in check. The TSP should not be viewed as a credit line for personal consumption purposes. Of course, it’s vital to consider your situation to determine whether or not removing money from the TSP is warranted by a true need.īefore worrying about anything else, the most important question involving a TSP loan needs be addressed: do you really need one? The decision to take a loan from the TSP should be based on two key factors: the use of the money and the ability to pay it back. TSP loans come with more favorable terms than an in-service withdrawal and may actually be useful in certain situations. Funds should only be removed from the TSP before retirement if absolutely necessary. Keep in mind this is the lesser of three evils, if you will. That leaves TSP loans as the most reasonable method of removing funds from your TSP. In general, taking an in-service withdrawal from the TSP should be avoided, and hardship withdrawals can only be made under specific circumstances. There are only three ways to withdraw money from your TSP while still working your federal job: an in-service withdrawal, a hardship withdrawal or a TSP loan. However, due to the restrictions on taking a withdrawal from the TSP while still in government service, it can be problematic if a short term need for extra cash happens to arise. Doing so is a key part of any long term strategy for Feds building the funds needed later in life. For that reason, feds should be stashing as much excess money into the TSP as manageable. When it comes to putting away money for retirement, it is second to none. As we know, the TSP is a top tier retirement account.
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