How an FST loan can benefit federal employees
The Retirement Savings Plan (TSP) is a retirement savings and investment plan for federal employees and uniformed service members. If you fall into this category and need to borrow money, you may be familiar with a TSP loan that allows you to borrow against your retirement savings. There are a lot of things to like about TSP loans, but there are also some big drawbacks that you should be aware of.
TSP loans are particularly well suited if you are absolutely certain that you will remain a federal employee until you pay off your loan. There are a lot of other considerations too, and we’ll walk you through them to help you understand if PST loans are right for you.
What is an FST loan?
A TSP loan is similar to a 401 (k) loan—Which lets you withdraw money from your retirement account – but designed especially for federal employees. However, there are several types of TSP loans, including:
- Residential TSP loans. You can use them to pay for the construction or purchase of your primary residence. TSP states that this can include homes, condos, and even RVs or boats. You cannot use residential TSP loans to refinance, renovate, or buy land on its own, although you can use a general TSP loan for these things. The term of office varies from one to 15 years.
- General TSP loans. These look a lot personal loans, and you can use them for just about anything. The term of office varies from one to five years.
How a TSP loan works
TSP loans allow you to borrow a portion of the money you have in your TSP account. In this case, you are essentially acting as your own lender and making repayments – with interest (currently 1.125%) that fluctuates with the average yield of all US Treasury securities with at least 4 years to maturity – on your own account.
Your TSP plan administrator does all of the background work for you, such as sending the loan funds and returning them to your account as you pay it back over time. However, it’s important to keep in mind that the interest rate you’ll pay yourself is likely lower than what you might earn elsewhere, such as on the stock market or other paid account.
The minimum amount you can borrow with a TSP loan is $ 1,000. The maximum amount you can borrow is limited by the following rules:
- You cannot borrow more than what you have contributed to the account plus your income.
- You cannot borrow more than 50% of your acquired account balance or $ 10,000, whichever is greater
- You cannot borrow more than $ 50,000 minus the amount of any TSP loan you took out in the past year
Since the median home price in the United States is $ 355,900, a TSP loan will hardly buy you a decent home in most areas. However, you can still use your loan to cover closing costs or even your advance payment, which may allow you to buy more home than you could otherwise.
When you take out a TSP loan, you are essentially acting as your own lender. This means that you borrow money that you have already saved (in your TSP) and pay it back – with interest (currently 1.125%). This is a major difference between TSP loans and other types of loans: normally the lender pockets the interest, but in this case you pay yourself the interest. This means that you should end up with more in the account than what you initially withdrawn.
Although the interest you pay goes back to your account, it is still less than what you could earn by investing your money in another fund. So even though your money may grow over the original amount, it will grow at a slower rate than it would in another interest-bearing account or in the stock market.
You will repay the loan slowly over time with a payroll deductions, where the money is automatically withdrawn from your paycheck. This money will go back to your TSP. You are allowed to have both types of TSP loans at the same time (a home loan and a general TSP loan), but you cannot have more than one of each type at the same time.
However, here’s one of the biggest kickers: If you quit federal service and still pay off your TSP loan, you’ll have to pay off the entire outstanding balance within 90 days. If you can’t – and let’s be honest, it could be a huge amount of money – the IRS will treat it as an early withdrawal, and if you’re under 59 and a half, you could owe income taxes and 10% earlier. withdrawal penalty on the unpaid balance. The 401 (k) are structured in the same way.
Once a taxable distribution is declared, you can transfer that amount into an IRA or workplace retirement savings plan at your new gig, if available, within 60 days to avoid taxes and penalties.
When should you use an FST loan?
TSP loans aren’t for everyone, but here are some clues that might mean they’re right for you:
- Your federal job is stable. TSP loans are the best if you have job security. If you’re a term employee, for example, and your job needs to be renewed every year with a deadline, choosing an FST loan could be a risky option. If you leave the department before paying off the loan, you will have to pay it all off at once.
- You don’t have the best credit. TSP loans are not based on credit. As long as you meet the other conditions that we list in the next section, you can usually get a loan.
- You are looking for ultra-advantageous rates. TSP loans charge the same interest rate as Fund G, one of the options available in the TSP itself. This rate is currently 1.125%. You’d be hard pressed to find such a good rate anywhere else, especially if you don’t have the best credit.
How to get a TSP loan
Getting a TSP loan is relatively easy compared to some other types of loans. Here’s a step-by-step guide to how the process works.
1. Make sure you are eligible
First of all, you must meet the following requirements:
- Have at least $ 1000 saved in your TSP account
- Must have no court order against you
- Must have “active-pay” status
- At least 60 days must have passed since you repaid your previous PST loan (if applicable)
- Must be a current federal employee (you cannot take out an FST loan after leaving federal service)
- At least 12 months must have passed since the last time you received a taxable distribution from your TSP
2. Complete the application
Connect to your TSP Account to apply for a loan. You will find an online tool that will guide you through the application process.
The tool will ask you for some information. If you are married, for example, you may need a signed consent form from your spouse. You will also need a few additional documents if you are taking out a residential FST loan. For example, you will need to provide documentation with the address of the house you are buying or building from a third party.
Depending on how the application tool walks you through the process, you may be able to complete the loan entirely online, or you may need to print out forms and submit them.
3. Get your money
If you are able to complete the request online, you can expect to receive your money within eight to 13 business days. If you need to send paper forms, it may take several weeks.
Either way, if you receive an approval, you will receive the money in the form of a check in the mail. Unfortunately, you cannot opt for electronic payment. An administration fee of $ 50 will be deducted from your loan proceeds, so the check you receive will be $ 50 less than the total amount you requested.
Benefits of TSP loans
- No credit check: Credit scores aren’t factored into loan decisions, which means it’s a particularly good option for people who can’t qualify for other loans because of their credit.
- Low interest rates: TSP loan rates are some of the lowest you will pay for any type of loan.
- Personal loan: You borrow and pay interest from yourself, rather than from a lender, so you keep all the interest you pay.
- Easy payments: Payments are automatically taken from your loan through payroll deductions.
- Benefits of non-paying status: If you are unpaid, for example if you are on leave or leave without pay, you can notify your TSP administrator and you will not have to make any payments until you start working again.
Disadvantages of TSP loans
- Does not create credit: TSP loans don’t require a credit check, but neither will they create credit or because your payments are not reported to the credit bureaus.
- Potential for a big surprise payment: If you leave federal service before paying off your loan, you’ll have to pay off the entire balance, even though it’s not your fault you had to leave. Otherwise, you will have to pay additional taxes and severe penalties.
- Missed opportunity cost: The interest rate you’ll pay yourself is probably less than what you could earn if you left it in another fund. This means that your money will grow at a slower rate.
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