General Purpose TSP Loans are on the rise, with recent data showing a significant jump in their usage. In 2023 alone, the number of outstanding loans increased by 40%. By the end of the year, nearly 480,000 loans were active, totaling close to $5 billion.
Why Are TSP Loans Increasing?
This surge in borrowing likely stems from a rule change made a few years ago. Previously, TSP participants could only have one General Purpose Loan and one Primary Residence Loan active at the same time. Now, the rule allows participants to take out two General Purpose Loans at once.
Unlike loans for a primary residence, General Purpose Loans can be used for anything—you don’t have to provide a reason for borrowing.
Things to Think About Before Taking a TSP Loan
How is the interest rate on a TSP loan set? It’s tied to the G Fund’s rate from the previous month. For instance, in November 2024, the G Fund rate was 4.375%, so that’s the rate for loans taken in December 2024.
While this interest rate may seem reasonable, borrowing from your TSP can impact your long-term savings. If your TSP account is earning a higher return than the loan rate, taking money out will slow the growth of your retirement savings.
There’s also the risk of loan payments straining your budget. If that happens, you might have to reduce your TSP contributions, which could shrink your nest egg even further.
Retiring with a TSP Loan: The Risks
If you’re nearing retirement and still paying off a TSP loan, it’s crucial to plan ahead. Here’s why: when you retire, your loan must be paid back in full within 90 days.
If you can’t pay it off, the remaining balance is treated as a distribution. This means the amount you owe will be taxed as income—and if you live in a state that taxes retirement distributions, you’ll face even more taxes.
If your loan comes from your traditional TSP balance, you’ll owe federal income taxes on the entire outstanding amount. This could result in a hefty tax bill at a time when you need your money the most.
Consider Alternatives Before Borrowing
Before taking out a TSP loan, explore other options like a home equity loan. These alternatives might come with fewer long-term drawbacks.
For personalized advice, connect with an FRC® trained advisor to make the best decision for your financial future.
