The Thrift Savings Plan (TSP) offers two types of loans for TSP participants. One loan is called a general-purpose loan, and the other is called a primary residence loan. When a TSP loan is disbursed, the TSP Service Office will notify the TSP participant’s payroll office immediately to begin deducting loan repayments from the TSP participant’s salary each pay period, no matter what pay cycle the TSP participant is in.
Separated TSP participants.
When a TSP participant leaves federal service (known as separation) the TSP participant can continue to have an outstanding loan. However, there are some process differences with respect to repayments. It is important to understand that when a civilian employee leaves or separates from federal service, one of the following is true when it comes to an outstanding TSP loan (either a TSP general purpose loan or a TSP primary residence loan):
- That the TSP loan is from a civilian TSP account (not from a Uniformed Service TSP account), and that the TSP participant is no longer a federal civilian employee, or
- That the TSP participant has transferred to an agency that is not covered by FERS, such as the Federal Reserve or an international agency.
Loan rules for separated TSP participants.
The following are the TSP loan rules for those TSP participants who have civilian TSP loans and who are separate from federal service:
- A departed federal employee cannot apply for a new TSP loan.
- Since the departed federal employee is no longer on the federal payroll, the departed employee must begin making loan repayments by check, money order or direct debit.
- A departed employee has the same options for making additional repayments or fully paying off the loan as a TSP participant who is in federal service (unless the loan has been foreclosed).
- If a departed employee does not pay off the loan in full or does not begin making payments by the deadline established by the TSP Service Office to the departed employee, then the TSP will treat the outstanding TSP loan balance and accrued interest as taxable income. This is known as a loan foreclosure. If the departed employee is younger than age 55 in the year that the TSP loan is foreclosed, then departed employee may be subject to the IRS’ 10 percent early withdrawal penalty. Unlike an active federal employee with a taxed TSP loan, a departed TSP employee may not repay a TSP loan balance once it has been foreclosed.
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Although a departed employee cannot repay a foreclosed TSP loan, the departed employee is able to use personal funds to rollover any or all of the taxable amount of the unpaid TSP loan (including accrued interest) back into the departed employee’s TSP account, or into an eligible employer-sponsored retirement plan or an IRA. In so doing, the departed employee avoids taxes and penalties on the unpaid TSP loan. The rollover must be completed by the due date (including extensions) for filing the federal income tax return for the year of the TSP loan foreclosure.
What happens if a departed employee with an outstanding TSP loan balance dies?
In the event of a departed employee’s death, the outstanding TSP loan balance plus any accrued interest is reported as a foreclosure to the departed employee’s estate. The TSP loan balance and accrued interest cannot be repaid by the estate or anyone else. The distribution is not subject to an early withdrawal penalty. However, any non-qualified Roth TSP earnings included in the distribution will be subject to federal income tax.
Over the last two to three months thousands of federal employees as been fired or reduced-in-force (“RIF’d”). Those fired or RIF’d employees with TSP loans must decide if they want to pay them off, keep them open, or allow them to be foreclosed and accept the outstanding balance and accrued interest as taxable income.
Failure to make TSP loan repayments in accordance with a departed employee’s TSP Loan Promissory Note can have serious financial consequences, especially if the departed employee is still working. The departed employee is responsible for ensuring that the TSP loan payments are correct and submitted on time regardless of whether the departed employee’s agency missed the loan payment.
For more information on TSP loans, employees and retirees should go to: https://www.tsp.gov/tsp-loans.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.