Financial emergencies happen. Borrowing from your Thrift Savings Plan (TSP) or 401(k) can be a lifeline in a financial pinch, but it’s not a decision to take lightly. Borrowing from your 401(k) or Thrift Savings Plan (TSP) is one of those financial moves that can feel deceptively simple; after all, you’re “just borrowing from yourself”, but the ripple effects can be long-lasting. Let’s walk through the steps in a way that’s clear, structured, and practical so you can make a fully informed decision.

Advantages of Borrowing from TSP or 401(k):

• No Credit Check: You’re borrowing from yourself, so your credit score isn’t impacted.
• Lower Interest Rates: Usually lower than personal loans or credit cards, and the interest you pay goes back into your account.
• Avoid Taxes and Penalties: Unlike early withdrawals, loans aren’t taxed if repaid on time.
• Quick Access to Funds: No lengthy approval process; funds are usually available within days.
• Continued Contributions: You can often keep contributing to your retirement while repaying the loan.

Disadvantages and Risks:

• Opportunity Cost – Money you borrow is no longer invested, so you miss potential market growth.
• Repayment Risk – If you leave your job, the outstanding balance may be due quickly (often within 60–90 days).
• Double Taxation – You repay with after-tax dollars, and you’ll be taxed again when you withdraw in retirement.
• Reduced Retirement Cushion – Even if repaid, you may fall behind on your long-term savings goals.
• Default Consequences – If you can’t repay, the loan becomes a taxable distribution, plus a 10% penalty if you’re under 59½.

Key Considerations Before Borrowing

• Purpose of the Loan: Is it for a true emergency or a discretionary expense? Retirement funds should be a last resort.
• Other Options: Have you explored emergency savings, personal loans, or even 0% APR credit cards first?
• Job Stability: If you’re considering a career change or retirement soon, repayment terms could get tricky.
• Tax Implications: Especially if you’re juggling Roth vs. Traditional accounts—each has different rules.
• Long-term Impact: Will this loan derail your retirement timeline or reduce your future financial security?

Here’s a clear, side-by-side comparison of 401(k) and TSP loans comparing loan provisions of TSP and 401(k):

Key Takeaways:

• TSP and 401 (k) Rules: They are similar, but TSP loans have a clearly defined Residential option with up to 15 years to repay.
• Interest Rates Charged Differ: TSP uses the G Fund rate + 1%, which is often lower than prime + 1% for 401(k)s.
• Job Stability Matters: Leaving your job can trigger immediate repayment for both.
• Opportunity Cost Is Real: Money borrowed is out of the market, so you lose potential growth.

Additional Resources:

• Thrift Savings Plan
• 401(k) – Rules vary by employer and plan. Check with your Human Resources office or 401(k) plan custodian for details.

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