For federal employees, borrowing from the Thrift Savings Plan (TSP) can seem like one of the most inexpensive ways to access cash. There is no credit check, the interest rate is generally lower than many personal loans, and the interest you pay goes back into your own TSP account. Those features make TSP loans attractive — but they don’t tell the whole story. The biggest cost of borrowing from your TSP often isn’t the processing fee or the interest rate. It’s the retirement growth you may give up while your money is out of the market.
Before taking a loan, it’s important to understand exactly how TSP loans work, what they cost, and when borrowing from your retirement savings may—or may not—be a smart financial decision.
How Do TSP Loans Work?
Eligible federal employees and members of the uniformed services who are actively employed may borrow money from their TSP account.
The TSP offers two types of loans.
General Purpose Loan
A General Purpose Loan:
- Can be used for almost any reason
- Does not require documentation explaining how the money will be used
- Must generally be repaid within one to five years
Primary Residence Loan
A Residential Loan:
- Must be used to purchase or build your primary residence
- Requires documentation supporting the purchase
- May be repaid over one to fifteen years
Residential loans cannot be used to refinance an existing mortgage, remodel a home, purchase vacation property, or buy investment real estate.
Who Can Borrow?
To borrow from the TSP, participants generally must:
- Be in active pay status
- Have at least $1,000 of their own contributions and earnings available to borrow
- Meet IRS borrowing limits
- Meet all TSP loan eligibility requirements
The TSP calculates your maximum loan amount automatically during the application process.
Applying for a TSP Loan
Applying is straightforward and is completed through your online TSP account. The process includes:
- Log into your TSP account.
- Choose either a General Purpose or Residential Loan.
- Review your available loan amount.
- Accept the repayment schedule and loan terms.
- Receive your funds electronically once the loan is processed.
Residential loans require supporting documentation before approval.
What Does a TSP Loan Cost?
Most people focus on the obvious costs.
TSP Loan Processing Fee
The TSP charges:
- $50 for a General Purpose Loan
- $100 for a Residential Loan
The fee is deducted from the loan proceeds.
TSP Loan Interest
The interest rate is equal to the G Fund rate in effect when your loan is processed. Unlike a bank loan, the interest you pay is deposited back into your own TSP account. At first glance, this sounds like a great deal. But there’s another cost many borrowers never consider.
The Hidden Cost: Lost Investment Growth
When you borrow from your TSP, the money you take out is no longer invested. That means it no longer participates in any gains—or losses—in the stock or bond markets until it is repaid.
Many federal employees think, “I’m paying myself interest, so I’m not really losing anything.” Unfortunately, that’s not necessarily true.
If your TSP investments would have earned more than the G Fund interest rate while your money was borrowed, you permanently miss that difference.
A Real-Life Example
Imagine Sarah, a 45-year-old FERS employee, needs $25,000 for an unexpected home repair. She takes a five-year General Purpose Loan from her TSP. During those five years:
- She faithfully makes every loan payment.
- She pays herself interest based on the G Fund rate.
- Everything appears to be working exactly as planned.
Now suppose that during those same five years, the stock funds in her TSP averaged an annual return of 10%. (Actual investment returns vary and cannot be predicted.) Had the $25,000 remained invested and earned 10% annually, it would have grown to approximately $40,300 after five years. Instead, because the money was removed from her investments and repaid gradually over time, much of that growth opportunity was lost.
The difference could easily amount to many thousands of dollars, even though Sarah “paid herself interest.”
And the impact doesn’t necessarily stop there. If Sarah retires 20 years later, every dollar of growth she missed in her mid-career also loses the opportunity to compound for another two decades.
That hidden opportunity cost can become much larger than the $50 loan fee or even the interest she paid herself.
Advantages of a TSP Loan
There are situations where borrowing from your TSP may make sense. Some advantages include:
- No credit check
- Generally lower interest rates than many personal loans
- Interest is paid back into your own TSP account
- Automatic payroll deductions simplify repayment
- Funds may be available quickly
Disadvantages of a TSP Loan
Borrowing from your retirement account also has meaningful drawbacks.
Reduced Retirement Growth
This is the biggest disadvantage.
Money that is borrowed is temporarily removed from your investments, reducing the potential for long-term compound growth.
Processing Fees
General Purpose Loans include a $50 processing fee. Residential Loans include a $100 processing fee.
Repayment Risk
If you leave federal service or stop making payments, the unpaid balance may become a taxable distribution if it is not resolved according to TSP rules.
Depending on your age and circumstances, additional IRS taxes or penalties may apply.
Less Money Working for Your Future
Even if you repay every dollar on schedule, your retirement account may still end up smaller than it otherwise would have been because borrowed funds spent time out of the market.
When Does a TSP Loan Make Sense?
A TSP loan may be appropriate when it helps avoid much more expensive debt, such as:
- High-interest credit card balances
- Certain personal loans
- Emergency borrowing with significantly higher interest rates
For some participants purchasing a primary residence, a Residential Loan may also be worth considering if other financing options are limited. However, a TSP loan should generally be viewed as a last resort rather than an easy source of cash.
Questions to Ask Yourself About a TSP Loan
Before borrowing, ask yourself:
- Is there another way to obtain the money?
- How much retirement growth might I miss?
- Can I repay the loan faster than required?
- What happens if I leave federal service before the loan is paid off?
- Will today’s financial need outweigh tomorrow’s retirement savings?
Other TSP Loan Resources
- TSP Loans Overview: https://www.tsp.gov/tsp-loans/
- TSP Loan Booklet: https://www.tsp.gov/publications/tspbk04.pdf
- TSP Account Login and Resources: https://www.tsp.gov/