Critical Ins and Outs of Repaying a TSP Loan
Beyond considering the financial
implications of taking out a loan from their Thrift
Savings Plan (TSP), federal employees should also be aware of the
many critical ins and outs when it comes to repaying the loan -- to avoid costly financial surprises down the road.
The rules for repayment should be carefully
reviewed in advance of applying for a TSP loan.
Thrift Savings Plan loan payments are made through payroll deductions.
When your loan is disbursed, the TSP will notify your payroll office immediately
to begin deducting loan payments from your salary each pay period.
Check your earnings and leave statement to be sure that loan payments
have started and that they are in the correct amount.
The TSP will report your loan transactions on your quarterly participant
statement. Review your statement carefully and report any discrepancies to your
agency or service.
You cannot suspend your loan payments.
When you agree to the loan terms, you agree to repay the loan in full and you
authorize payroll deductions.
If you are experiencing financial difficulties, you may be able to
reamortize your loan to reduce the amount of each payment, but you cannot stop
the payments. (see the reamortization section below).
What if you miss a loan payment?
At the end of each calendar quarter, the TSP will identify any loan account
with missing payments. If your loan is identified, the TSP will send a notice to
you indicating that you have until the end of the following calendar quarter to
pay the missing amount.
You are responsible for ensuring that correct loan payments are submitted on
time. It does not matter whether your agency or service was responsible for the
missed loan payment. You must pay the missed amount directly to the TSP using
your own personal funds in order to avoid a taxable distribution. Your payroll
office cannot make up missed payments from your paycheck.
A taxable distribution will be declared on the unpaid balance (including
any accrued interest) if you do not make up the missing amount. This means that
the IRS will consider the unpaid balance of your loan to be taxable income. In
addition, if you are under age 59½, you may have to pay a 10 percent early
withdrawal penalty tax. Once a taxable distribution has been declared, the loan
is closed and you will not be allowed to repay it.
Consult the IRS or a tax advisor for information and advice if your loan is
declared a taxable distribution.
What is the impact of a taxable distribution?
A taxable distribution permanently reduces your TSP account. If the TSP
declares a taxable distribution of your loan, your final account balance at
retirement will be less than it otherwise would have been.
A taxable distribution will affect your eligibility for another loan. You
cannot apply for another loan from that account within 12 months of the date of
the distribution (unless the distribution was due to separation).
If the taxable loan distribution was declared because you
separated
from federal service, you may roll over (within 60 days) any or all of the
taxable amount into a traditional IRA or an eligible employer plan using your
personal funds. You thereby avoid taxes and penalties on that amount. Members of
the uniformed services can also roll over tax-exempt amounts to an IRA, if the
IRA will accept them.
The TSP will send you the appropriate tax form by January 31 of the year
after the distribution.
What happens if you declare bankruptcy?
In the event of bankruptcy, read the TSP Fact Sheet
"Bankruptcy
Information, Petitions filed after October 17, 2005." This fact
sheet is available from the TSP Web site at www.tsp.gov
Reamortizing your your loan
You can reamortize your loan at any time to change your payment amount or to
shorten or lengthen your term, so long as you do not exceed the 5-year maximum
term for a general purpose loan or the 15-year maximum term for a residential
loan. There are no restrictions on the number of reamortizations that you can
have during the life of a loan. You can reamortize your loan on the TSP Web site
or by calling the TSP.
You cannot reamortize your loan if your loan is in default because of missed
loan payments. Once you make up the missed payments, you can reamortize your
loan.
What happens if you change agencies or payroll offices?
If you change agencies or payroll offices you must inform your new agency
that you have a TSP loan and instruct it to continue your TSP loan payments. If
you transfer to an agency that has a different pay cycle from your current
agency, you should reamortize your loan to avoid being in default.
Making additional payments and early pay-off
You can make additional loan payments to restore your account more quickly or
to make up for missed payments. Payments can be made by personal check or money
order. Make checks or money orders payable to the Thrift Savings Plan and
include your loan number on the checks or money orders. You will receive a
notice confirming your payment. Please allow up to 2 weeks for processing.
Employees with intermittent pay schedules should consult with their agencies
or services before taking a loan from their TSP accounts so that they don't
suffer taxable distributions due to missed payments.
You can also prepay your loan in full at any time without a prepayment
penalty. The TSP Web site at www.TSP.gov can
provide you with the prepayment amount, which includes all unpaid principal and
any unpaid interest.
The TSP will notify you and your payroll office when your loan has been paid
in full. If payments continue, contact your payroll office immediately.
Send your payment with a loan payment coupon, which can be downloaded from the
TSP Web site (www.tsp.gov). Be sure to
provide your complete Social Security number on the coupon to help us
identify your account.
What happens to my TSP loan when I leave federal
service?
If you leave federal service, your withdrawal request cannot be
processed until your loan is closed by either payment in full or
taxable distribution.
If you leave federal service, you must repay the loan in full, including any
interest on the outstanding principal. If you are requesting a withdrawal
of your TSP account, delay in repaying your loan will affect the processing of
your withdrawal. If you do not repay the loan, the TSP will declare a
taxable distribution for the balance of the outstanding principal and
interest. The TSP will also declare a taxable distribution to your estate
if you have an outstanding TSP loan when you die.
What happens to my TSP loan if I die?
In the event of your death, the outstanding loan balance plus any
unpaid interest is reported as a taxable distribution to your estate. Your
loan cannot be repaid. The distribution is not subject to an early withdrawal
penalty tax.
What happens to my TSP loan if I separate to perform military
service?
If you are a civilian employee who separated to perform military service and
a taxable distribution was declared for the loan from your civilian account, you
may be eligible to reverse the distribution when you return to Federal civilian
service. Contact the TSP to determine your eligibility.
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