Government Careers

Thrift Savings Plan Loan Pros and Cons

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Updated April 30, 2017

One of the three primary methods employees under the Federal Employees Retirement System use to save for retirement is the Thrift Savings Plan. This plan functions much like a 401(k) offered through private investment companies and employers. The other two primary methods federal employees use for retirement are a pension and Social Security.

Because the Thrift Savings Plan is meant to earn investment income for retirement, federal employees are supposed to leave their money in the plan until they retire. However, the US Office of Personnel Management allows federal workers to withdraw money before retirement following plan provisions. OPM administers the Thrift Savings Plan.

One way to withdraw money from the Thrift Savings Plan is a loan. The two types of Thrift Savings Plan loans are general purpose loans and loans for the purchase or construction of a primary residence.

While there are advantages and disadvantages to taking out a Thrift Savings Plan loan, the disadvantages far outweigh the advantages to such an extent that OPM advises federal employees to exhaust all other loan options before borrowing from their Thrift Savings Plan accounts. That said, outlined below are the pros and cons of taking out a Thrift Savings Plan loan.

Pros

The positive aspects of taking out a Thrift Savings Plan loan are the following:

  • Low-interest rate: The interest rate on Thrift Savings Plan loans is the same as the rate of return on the G Fund. This fund is one of the funds available to invest in through the Thrift Savings Plan. It is made up of government securities. The G Fund and other Thrift Savings Plan funds are used to create the investment mixes for target date funds available to plan participants. The G Fund typically has a rate of return of less than 2.0%. The rate used for a loan is the G Fund rate the day the loan is taken out.
  • A wide range of allowable loan amounts: Provided you have the money in your account, you can borrow between $1,000 and $50,000. The Thrift Savings Plan website has a loan calculator you can use to estimate your loan payments.
  • Repayment through payroll deductions: From a processing standpoint, Thrift Savings Plan loans are easy to repay. Payments are made by payroll deduction.
  • Ability to make additional payments at any time: If you want to make an additional payment on your loan, you can do that with a loan repayment coupon available on the plan website. The coupon helps ensure that your payment is applied to your loan. If you pay off extra principle in the early years of your loan, you can pay the loan off early or re-amortize it to make smaller payments.

    Cons

    The negative aspects of taking out a Thrift Savings Plan loan are the following:

    • Application processing fee: A $50 processing fee is applied to each loan. It is deducted from the money you receive when you take out the loan.
    • Missing out on earnings: This is the most significant disadvantage to taking out a Thrift Savings Plan loan. You are essentially borrowing from your own future when you take out the loan. When you remove the money from your Thrift Savings Plan account, you forgo the investment growth you would have earned. On top of that, you have to pay back your own money with interest.
    • 90-day repayment if you leave federal service: If you leave federal service while you have a Thrift Savings Plan loan outstanding, you must repay it within 90 days. Otherwise, the outstanding amount will be reported to the Internal Revenue Service as income.
    • Short loan terms: The loan periods are relatively short. General purpose loans must be repaid within five years. Residential loans must be paid off within 15 years.

    It is important to reiterate that OPM recommends exhausting all other loan options before taking out a loan from a Thrift Savings Plan account.