The national economy is suffering. Homeowners cannot afford their newly adjusted

mortgage payments, frequently resulting in foreclosures. Recently, the

stock market has suffered through one of its worst performances in several

years. Many banks have failed in the last year with perhaps more failures

to come.

As the housing, stock market and bank crises grip the country, many

individuals are turning to their retirement plans -- for example, 401(k) plans

and the Thrift Savings Plan (TSP) -- for financial relief. They are borrowing

from their retirement plans to pay their monthly mortgage, car loans and credit

card bills.

According to the Federal Reserve Board's Survey of Consumer Finances, loans

against retirement plans have increased from $6 billion in 1989 to $31 billion

in 2004, the last year with available data. It is most surely a much larger

number in 2008.

Before discussing the advantages and disadvantages of TSP loans, it

is important to review TSP loan rules:

• Only employees who are in pay status are eligible for TSP loans. Only

  employee contributions and earnings - not agency contributions and earnings -

  can be borrowed.
  
  

• Two types of loans are available - general purpose loans and loans in order

  to purchase a principal residence. Loans to purchase to purchase a rental

  property or a second/vacation home are not permitted.
  
  

• The minimum loan amount is $1,000. To be eligible for a loan, a TSP account

  owner must have at least $1,000 of contributions and earnings on those

  contributions in his or her account.
  
  

• The maximum loan amount is $50,000. But the maximum amount one can borrow

  also depends on the individual's TSP contributions, any outstanding TSP loans

  that the individual may have, and any limits set by the Internal Revenue

  Service.
  
  

• The interest paid for the life of a TSP loan is the Government Securities

  (G) fund rate at the time a TSP application is processed. The interest paid on

  the loan is deposited into the loan owner's account along with repayments of

  loan principal. A one-time fee of $50 covering the cost of processing and

  servicing of the loan is deducted from the loan proceeds.
  
  

• Loans must be repaid - usually through payroll deductions - over the payment

  period specified in the TSP loan agreement. To repay a loan more quickly, or to

  make up for missed payments, TSP owners can pay by personal check or by money

  order. There is no penalty for prepaying a TSP loan.
  
  

• All loans must be repaid before the borrower retires or leaves federal

  service. If a TSP in not repaid, the TSP will declare a taxable distribution for

  the balance of the outstanding principal and interest.

For many employees, TSP loans sound like a logical way to get some needed

cash to pay for unforeseen expenses or to help purchase a principal residence.

What are some advantages of TSP loans?

• Paying yourself interest. Paying a reasonable amount of interest to yourself

  instead of an extravagant amount to a finance or credit card company would seem

  to be a less expensive way for employees to borrow.
  
  

• Easy loan application. The TSP loan application is easy and straightforward.

  No one is turned down for a loan provided there are sufficient employee

  contributions and earnings. No credit check is required. Other types of loans -

  for example, home equity loans, require a more complex application process, a

  credit check and more fees.
  
  

• No credit repercussions. If a TSP loan borrower loses his or her job,

  retires or leaves federal service and is unable to pay off the loan balance, the

  unpaid balance will be classified as a distribution for which income taxes must

  be paid. But it will not show up on the borrower's credit report as a "loan

  default."

But there are some disadvantages to TSP loans, including:

• Paying taxes twice. By taking on a TSP loan, the account owner is moving

  tax-deferred assets into the taxable realm. One must use after-taxed income to

  repay the loan. For example, if an individual is in a 25 percent tax bracket,

  the individual would have to earn $125 to repay every $100 in principal and

  interest. After retirement, when the individual withdraws the same money used to

  repay the loan, the individual will pay income tax again on the same

  money.
  
  

• Sacrificing growth and losing ground .Perhaps the most powerful feature of a

  retirement plan like the TSP is the tax-deferred growth and compounding of

  earnings and contributions. Removing these assets from one's TSP account via a

  loan can significantly affect the growth of one's account. Some borrowers have

  to reduce or suspend their TSP contributions in order to repay the loan. The

  overall result could be a smaller TSP retirement "nest egg", possibly forcing an

  individual to postpone retirement in order to continue contributing to the TSP

  to make up for any "nest egg" deficit.
  
  

• Potential tax penalty. If one fails to pay off a TSP loan, then income taxes

  - federal and possibly state - will be due. An additional IRS early withdrawal

  penalty of 10 percent will be applied if the account owner is younger than age

  59.5 at the time of the loan default.

Employees who are tempted to dip into their TSP accounts via a loan to meet

current needs should ask themselves: "Is my current need important enough that I

want to risk reducing my level income during retirement?"  Perhaps it would

make good sense for these employees to talk to a financial advisor or tax

consultant before they borrow from their TSP accounts. A financial or tax

professional should be able to evaluate the effects of a loan and to make

suggestions for alternative ways to tapping into one's TSP retirement assets.

About the Author

Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent

in Silver Spring, Maryland. He is also a registered representative with

Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also

located in Silver Spring, Maryland

To read more articles by Ed Zurndorfer, href="http://www.myfederalretirement.com/public/department70.cfm">go

here