Beyond considering the href="http://www.myfederalretirement.com/public/130.cfm">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 href="http://www.tsp.gov">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.