If you’re considering a Thrift Savings Plan (TSP) loan or an in-service withdrawal, it’s important to compare the two to see which one is the better option.
Two Types Of In-Service TSP Withdrawals
An in-service withdrawal from your TSP account is made while you’re still actively employed by Uncle Sam. There are two types of in-service withdrawals: age 59-1/2 withdrawals and hardship withdrawals. Both types are permanent withdrawals from your TSP account that reduce the amount of savings that are generating compound interest.
Age 59-1/2 Withdrawals
You can only withdraw funds in which you are vested and the amount must be at least $1,000 or your entire vested balance (even if it’s less than $1,000). The amount you withdraw is immediately subject to federal income taxes and may be subject to state income taxes depending on state tax laws.
Financial Hardship Withdrawals
You can make a financial hardship withdrawal due to severe financial need while you’re still employed. You can only withdraw funds in which you are vested based on your years of service. The amount must be at least $1,000 or your entire vested account balance (even if it’s less than $1,000). The amount withdrawn is immediately subject to federal income taxes and may be subject to state income taxes depending on state tax laws. You’ll also have to pay a 10% early withdrawal penalty tax if you’re younger than 59-1/2. For complete rules on eligible hardship withdrawals download: In-Service Withdrawals.
“Even better– the interest rate is typically lower than commercial lenders and the amount of the loan is not considered taxable income.”
TSP Loans
If you’re eligible for a TSP loan, it has certain advantages over an in-service TSP withdrawal. Your payments are automatically deposited back into your TSP account which means you can continue to accrue earnings on the money you borrowed as you pay it back. Even better – the interest rate is typically lower than commercial lenders and the amount of the loan is not considered taxable income. There are two types of TSP loans:
- A General Purpose loan can be used for any reason and, since you’re not obligated to explain why you’re taking the loan, there’s no documentation required.
- A Primary Residence loan requires supporting documentation to show the costs required to purchase your primary home or start construction on your primary residence. It can’t be used for a vacation home or investment property.
For both types, the loan is capped at half of your vested balance or $50,000, whichever is less. Remember — if you carry a TSP loan into retirement you have 90 days to pay the balance or else it will be taxed as a TSP distribution.
To learn more, connect with an FRC® trained advisor.
