TSP Loan: Pros vs. Cons
A Thrift Savings Plan or TSP is a retirement savings program that federal employees and members of the uniformed services get as a benefit. Contributions to a TSP are tax-deferred, grow over time, and the funds can be withdrawn after retirement. Federal employees may also borrow against these contributions. If you are a federal employee, consider the pros and cons of a TSP loan and check out an alternative solution with our Access Loans product.
Pros Of A TSP Loan
A TSP loan is offered specifically to help federal employees, which is why it does present benefits over a typical personal loan.
a. No Credit Check Required
First, all federal employees can borrow from their TSP regardless of their credit score. It doesn’t require much paperwork, but it does have some requirements:
- You are in active status or are currently employed by the federal government
- You need a minimum of $1,000 in your TSP account
- There shouldn’t be any court orders against you
- You have paid off your last TSP loan at least 60 days before the application
- 12 months have elapsed since you last took a taxable distribution from your TSP account
b. Low Interest Rate
Although it varies from time to time, TSP loans typically have a lower interest rate than other loans, which is almost always below 2%.
c. No Penalty For Early Payment
You have the option to pay off your loan early without having to worry about any penalty. You don’t have to get stuck paying a fixed amount every moth.
Cons Of A TSP Loan
a. IRS Reporting
A TSP loan is a benefit reserved for federal employees. So, if you retire, you will still be responsible for the loan payments. If you fail to make payments, the entire loan will be reported to the IRS as income.
b. Affects Your TSP’s Growth
When you borrow from your TSP, you are essentially borrowing from your savings. The loan will dock the investment growth of your retirement savings. This could have a significant impact on your financial health in the future.
c. Does Not Help Build Credit
Although TSP loans have low interest rates and monthly payments, unlike regular loans, they do not contribute to your credit score. Your payments are not reported to credit bureaus. Those who need to build their credit ratings may want to reconsider the TSP loan.
Alternatives To A TSP Loan
So, it possible to get some of the pros of a TSP loan without having to suffer from the cons? Our Access Loans product may be a good alternative. Our product can provide the following:
- Fast and easy applications process, which can be done online
- No hidden charges
- No fees for early payment
- Convenient bi-weekly payments
- Flexible payment arrangement, if no longer employed by the federal government
Learn more about our Access Loan product.
2022 ACCESS LOANS™ product is offered by Safra National Bank of New York (“SNBNY”) Member FDIC, Equal Housing Lender.
