If you’re weighing a Thrift Savings Plan (TSP) loan against an in-service withdrawal, it’s essential to understand the differences to choose the best option for your needs.
Two Types of In-Service TSP Withdrawals
In-service withdrawals allow you to take funds from your TSP while still employed. There are two main types:
Age 59½ Withdrawals
For employees 59½ or older, you can withdraw vested funds with a minimum withdrawal amount of $1,000, or your entire balance if it’s under $1,000. These withdrawals are subject to federal and possibly state income taxes.
Financial Hardship Withdrawals
Available for employees facing severe financial need, hardship withdrawals allow you to access vested funds. Like age-based withdrawals, the minimum is $1,000, or your full vested balance if it’s under that. The withdrawal is immediately taxed, and if you’re under 59½, there’s a 10% early withdrawal penalty. For full eligibility details, refer to the TSP’s In-Service Withdrawals guidelines.
TSP Loans
TSP loans can be a beneficial alternative to withdrawals, offering several advantages. Loan payments go back into your TSP account, so you keep earning on the money borrowed as it’s repaid. TSP loan interest rates are also generally lower than those of commercial loans, and the loan amount isn’t counted as taxable income.
There are two types of TSP loans:
- General Purpose Loan: Use this for any reason without needing to explain your purpose or provide documentation.
- Primary Residence Loan: This loan requires documentation to show the costs of purchasing or building your main home (not for vacation or investment properties).
Loan amounts are capped at the lesser of half your vested balance or $50,000. If you have an outstanding TSP loan at retirement, you’ll need to repay it within 90 days, or it will be taxed as a distribution.
To learn more, consider reaching out to an FRC® trained advisor.
