TSP loans: how they work and what they cost

There are exactly two, and they differ in how long you get and what you must prove. A general purpose loan runs 12 to 60 months and needs no documentation at all. You do not even state what the money is for.

A primary residence loan stretches much further, 61 to 180 months, but it asks a great deal more. You have to supply documentation of the costs, and the TSP has to receive it within 30 days of your request.

What that second loan can pay for is narrower than the name suggests. It covers the future purchase or construction of a primary residence, meaning amounts still needed to close, such as a down payment or settlement fees.

Several obvious uses are ruled out. You cannot reimburse yourself for earnest money you already paid, buy out someone else's share of the home you live in, or buy land on its own. The booklet puts it plainly: this loan is not a mortgage.

The floor is simple and the ceiling is not. The minimum is $1,000. The maximum is the smallest of three separate figures, and most people misjudge it because they remember only one of them.

The first is your own contributions and the earnings on them, excluding any outstanding loan balance. Agency contributions are not borrowable, which alone surprises people who look at their total balance and assume half of it is available.

The second is where the arithmetic turns. It is 50 percent of the portion of your balance made up of your own contributions and earnings, or $10,000, whichever is greater, minus any outstanding loan. That "whichever is greater" sits inside a "smallest of", so the shorthand of half your balance is wrong in both directions.

The third is a hard statutory ceiling: $50,000, minus your highest outstanding loan balance over the previous 12 months. Money you have invested through the mutual fund window is excluded from all three calculations, because it cannot be borrowed at all.

The visible costs are genuinely small, which is most of why the loan is so tempting. There is a one-time fee taken straight out of the loan amount: $50 for a general purpose loan, $100 for a primary residence loan. It never comes back to your account.

The interest rate is set once and then frozen. It matches the G Fund rate for the month before you request the loan, and it stays there for the life of the loan no matter what rates do afterward.

The interest itself is not a cost in the ordinary sense. It goes into your own account rather than to a lender, which is the fact behind the widespread belief that a TSP loan is close to free.

That belief is half right. Nothing in this section is expensive. The expensive part is in section five, and it does not appear on any statement.

While you are still working, repayment is automatic. Payments come out of your pay by payroll deduction, and the payment amount is fixed for the life of the loan.

Only two things change it. A transfer to another agency with a different payroll schedule will, and so will a period of nonpay status. A pay-cycle change triggers a reamortization, which resets the payment to match your new schedule rather than changing what you owe.

One administrative detail causes real damage. If your address is out of date after an agency move, you may never learn that your loan has slipped into delinquency. The TSP warns that this can carry serious tax consequences.

Leaving federal service changes the picture entirely, and that is covered elsewhere. Your final paycheck explains the clock that starts at separation and what happens to an unpaid balance.

Money you have borrowed is money that is not invested. For the whole repayment period, the borrowed portion earns the loan's interest rate rather than whatever your allocation would have returned. The TSP says so directly: you will be missing out on the compound earnings that money could otherwise have accrued.

The booklet is more specific about when it hurts. If your investments earn a higher return than the loan's interest rate, your account ends up smaller than if you had never borrowed. Since the rate is pegged to the G Fund, that gap is the difference between the G Fund and whatever you actually hold.

There is a second, quieter version of the same problem. If repayments squeeze your budget enough that you cut contributions, the TSP notes your account will not grow. Cutting below 5 percent also costs you part of the agency match.

None of this makes a loan wrong. It makes the price something other than the fee. Growth figures vary with your allocation and your timeframe; see our assumptions for the values our calculator uses.

The decision is rarely about the loan in isolation. It is about what the money would otherwise cost you, which means comparing the forgone growth against the rate on whatever you would borrow instead.

A few things move the answer more than the rest:

One question is worth asking before any of those. If the need is an emergency rather than a purchase, cash savings versus extra TSP covers why a separate cushion exists. Reaching into retirement money is the option that cushion was meant to prevent.

We describe the trade rather than name an answer, because the right one depends on your rate, your timeframe, and what you would do instead. To see where your TSP sits in your overall plan, run your free readiness score.

• The term. Five years out of the market is a very different cost from fifteen, even at the same amount.
• Your allocation. The gap between the loan rate and your returns is the whole cost, so a G Fund investor loses far less than a stock-heavy one.
• Whether you can keep contributing. Cutting below 5 percent to afford the payments forfeits part of the agency match, which is a separate and immediate loss.
• What the alternative charges. A loan you would otherwise take at a high rate changes the comparison entirely.