In Service TSP Withdrawal vs. TSP Loan

If you are in need of cash while you are still a federal employee and decide to take a Thrift Savings Plan (TSP) withdrawal, you can use one of two options. One is a loan, and the other is an In-Service TSP Withdrawal. Before you decide, it might be useful to make a comparison of the costs and tax impacts of both and possibly seek out some TSP Advice before making a final decision.

As far as the loan is concerned, you pay a $50 loan fee and you won’t be able to accrue any earnings on the outstanding loan amount. It won’t have any impact on your tax liability unless you neglect to repay the loan and it gets declared as an unqualified distribution.

The TSP loan may also not have any impact on matching contributions from retirement plan systems such as Federal Employees Retirement System (FERS).

Costs and Tax Impact of In-Service TSP Withdrawal

With an In-Service TSP Withdrawal, your retirement savings are permanently reduced by the amount withdrawn, and you can lose all the future earnings this amount could have generated. The unqualified withdrawal also immediately adds to your tax liability through the 10% early withdrawal penalty.

If you apply for a TSP financial hardship withdrawal, you won’t be able to make any employee contributions for six months. Furthermore, FERS employees will also lose matching contributions for this period.

In other words, an In-service TSP withdrawal may carve a hole in your retirement savings, dig in deeper with a 10% tax bill, and then bar you from making up for it through further contributions from you and the federal government.

Put simply, a TSP loan that costs you $50 and temporary loss of earnings is a much more appealing alternative as compared to the permanent damage an early withdrawal will do to your federal retirement savings.