Loan Analysis:
Loan Repayment Breakdown
Growth vs. Loan: The Opportunity Cost
How to Use This Calculator
- Enter Loan Amount: Input the total amount you plan to borrow from your TSP. The minimum is $1,000. The maximum is the lesser of 50% of your vested account balance or $50,000.
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Set Loan Term: Choose the repayment period in years.
- For a general purpose loan, this can be from 1 to 5 years.
- For a residential loan (to purchase or build a primary residence), this can be from 1 to 15 years.
- Confirm Interest Rate: The calculator is pre-filled with an example rate. You must change this to the correct rate for your loan. The TSP loan interest rate is always equal to the G Fund’s rate of return from the month preceding your application. Check the official TSP website for the current rate.
- Select Pay Frequency: Choose how often you are paid. This is typically bi-weekly for federal employees. This determines how your payments are calculated and deducted.
- Estimate Market Return: This is the most important field for understanding the *true cost* of the loan. Enter the annual percentage you believe your investments would earn, on average, if the money remained in your TSP account. A common long-term stock market average is 7-8%.
- Calculate & Analyze: Click “Calculate Loan Details” to see your results.
- Results Grid: You’ll see your periodic payment, total interest paid (to yourself), payoff date, and the critical Opportunity Cost figure.
- Charts: Two graphs will visualize your loan. The first shows the simple breakdown of principal vs. interest. The second, more powerful chart shows the difference between your declining loan balance and the potential growth of that same money had it been left invested. This is the visual representation of your opportunity cost.
Note: This calculator is an educational tool. The “interest” on a TSP loan is paid back to your own account, but this does not erase the significant opportunity cost of pulling money out of the market.
The Ultimate TSP Loan Guide: Borrowing From Your Future Self
That Pot of Gold at the End of the Rainbow… Can I Dip Into It Now?
For millions of federal employees, the Thrift Savings Plan (TSP) isn’t just a line item on a pay stub; it’s the bedrock of their financial future. It’s a quiet promise of security, growing steadily in the background. But life has a funny way of happening *now*. A leaky roof, a dream home down payment, or a mountain of high-interest credit card debt can make that growing TSP balance look less like a future promise and more like a present-day solution. The TSP loan program seems to offer the perfect answer: borrow from yourself, pay yourself back with interest, all at a low rate. What could go wrong?
Well, it’s not that simple. Taking a TSP loan is one of the most debated topics in federal employee circles, and for good reason. It’s a financial tool with unique benefits and deeply hidden risks. Before you sign the paperwork, it’s crucial to look beyond the surface-level appeal and understand what you’re *really* giving up. This guide, along with our advanced calculator, aims to pull back the curtain.
The Mechanics: How Does a TSP Loan Actually Work?
On the surface, it’s beautifully simple. You’re borrowing your own money. The process is straightforward, with no credit check required. But let’s get into the specifics.
The Interest Rate: The G Fund Connection
The interest rate you pay on a TSP loan isn’t arbitrary. It’s fixed for the life of the loan and is set to the rate of return of the G Fund in the month before you submitted your application. If the G Fund earned 4.2% last month, your loan’s interest rate will be 4.2%. This is often much lower than personal loans or credit cards, which is a major selling point.
Paying it Back: To Yourself
When you make loan payments via payroll deduction, you’re not just paying back the principal you borrowed. You’re also paying that interest… directly into your own TSP account. So, if you pay $1,000 in interest over the life of the loan, that $1,000 ends up back in your TSP. This leads many to say, “It’s a wash! I’m just paying myself.” But as we’ll see, that’s a dangerous oversimplification.
General vs. Residential Loans
There are two flavors of TSP loans. A general purpose loan can be used for anything and must be paid back in 1 to 5 years. A residential loan is specifically for the purchase or construction of a primary residence, requires documentation, and gives you a much longer repayment term of 1 to 15 years.
The Hidden Danger: Opportunity Cost, The Silent Killer of Wealth
Here we arrive at the heart of the matter. The single most important factor to consider is not the interest rate you pay, but the growth you lose. This is the opportunity cost.
Imagine you borrow $20,000 from your TSP. That money is pulled from your investment funds (like the C, S, or I funds). It is no longer invested in the stock market. It is no longer generating returns. If the market goes up 10% that year, your $20,000 missed out on earning $2,000. That’s a $2,000 loss you can never get back. The interest you pay yourself back might be 4%, but if you missed out on 10% growth, you’ve experienced a net loss of 6%.
When you take a TSP loan, you are effectively forcing a portion of your portfolio to earn the G Fund rate (the interest you pay yourself) instead of its potential market rate. You are choosing the safest, lowest-returning fund by default.
This effect compounds over time. A 5-year loan means five years of potentially missing out on market gains. Our calculator’s second chart visualizes this starkly, showing what your money *could have become* versus the simple loan balance. This is the true, hidden cost of a TSP loan.
The Double-Taxation Trap
There’s another sneaky “gotcha” to be aware of. If you contribute to a traditional (pre-tax) TSP, your contributions go in tax-free. When you take a loan, you repay it with after-tax dollars from your paycheck. This means the principal you repay has now been taxed.
Fast forward to retirement. When you withdraw that same money you borrowed and repaid, you will pay income tax on it again. In effect, the principal portion of your loan is taxed twice. This doesn’t apply to Roth TSP contributions, but for the millions using the traditional TSP, it’s a significant, often overlooked, penalty.
What if I Leave My Job? The Loan Becomes Due.
This is a critical risk. If you leave or retire from federal service with an outstanding TSP loan, you must repay it in full, typically within 90 days. If you can’t, the outstanding loan balance is declared a “taxable distribution.” This means it will be treated as income for that year, subject to federal and state income tax, and if you’re under 59½, you’ll likely face an additional 10% early withdrawal penalty. A manageable loan can suddenly become a massive tax bomb.
So, Is a TSP Loan Ever a Good Idea?
After all those warnings, you might think a TSP loan is never the answer. That’s not necessarily true. It’s a tool, and like any tool, it has its place. A TSP loan might be a reasonable option if:
- You are paying off extremely high-interest debt. If you have credit card debt at 25% APR, paying it off with a 4% TSP loan could save you a fortune in interest, potentially outweighing the opportunity cost. This is a math problem you must solve carefully.
- It’s a true, short-term emergency. If the alternative is financial ruin, a TSP loan is a lifeline. The key is to have a concrete plan to pay it back as aggressively as possible.
- You are extremely risk-averse. If you would have moved your money to the G fund anyway during a market downturn, the opportunity cost is moot.
Conclusion: A Decision That Demands Respect
A TSP loan is not “free money,” and it’s certainly not just “borrowing from yourself” without consequences. It is an act of pulling funds from your future to solve a problem today. The cost of that act is measured in the lost compound growth that you can never recover.
Use this calculator. Play with the numbers. Be brutally honest with the “Estimated Annual Market Return” field. Look at the opportunity cost chart and ask yourself if the immediate need is worth the long-term deficit. Sometimes, the answer may be yes. But you should never make that decision without seeing the full, unvarnished picture first.