What is a Thrift Savings Plan Loan? Can I avail it to repay my loans?

Due to the economic crisis, most homeowners are finding it increasingly difficult to repay their adjusted mortgage rates, resulting in forced foreclosures. Stock market, too, has seen a recent plunge that’s quite unforgettable especially to avid investors. Many giant banks wound up its business.

The individual, however, seems to be in a financial dilemma, with no products to invest in. They are now turning to safer products like retirement plans – IRA’s, Thrift Savings Plan, and 401k’s – for better financial safety and relief. Individuals are using these investment products to repay their credit card debts, mortgage, and utilities, by borrowing on them.

Let’s have a look at the rules of Thrift Savings Plan loan:

• People who are still under Federal service are eligible for a loan. Also, the amount of loan is limited to individual contribution, not agency’s contribution.
• You can avail a loan to buy primary residence or for other general emergencies. You cannot avail a loan for vacation or to buy a second home.
• Minimum loan amount on a Thrift Savings Plan is $1,000. Hence, an individual should have made a contribution of at least $1,000.
• The loan amount cannot exceed $50,000. However, other limitation on the maximum loan amount can be set by IRS as well.
• The amount of loan must be repaid within the period given by regulators, through payroll payment deductions. To repay the loan amount before the given tenure, one can make early payments though a check or a money order. No fees are charged if any in pre-pays a Thrift Savings Plan loan.

For many individuals, availing a TSP loan seems to be a great way to meet their financial expenses temporarily.

There are few advantages of obtaining a Thrift Savings Plan loan

• You pay interest to yourself:
  Instead of paying a huge interest to credit card companies or other banks, you pay interest to yourself.
• Easy Process:
  Applying for a Thrift Savings Plan loan is an effortless process. People who are eligible for a loan are never turned down. So, it’s an easy source of money.
• No repercussion of non-payment:
  If an individual is unable to repay the loan amount due to job loss, or hospitalization, or any other emergency, any remark is seen on the credit report.

There are, however, few disadvantages as well of availing a TSP loan

• Two times tax:
  If an individual avails a TSP loan, he/she is paying additional taxes. Already tax-deferred amount is taxed.
• Growth is awfully affected:
  One of the bebst advantages of having a retirement plan like TSP is it’s compound growth. If you, however, take a loan from this account, the growth will be awfully affected, not providing much of profit.
• Tax Penalty:
  If one fails to repay the loan amount, he/she might have to pay an early withdrawal penalty of 10%. This will be applicable to people under the age of 591/2 years.

Though a Thrift Savings Plan loan is a good source of finance during emergencies, it can hamper the growth of your investment. Hence, before availing such loan, all the pros and cons should be measured.