TSP Loans can be a luxury or a curse depending on your situation and your use of the funds. While there are huge debates about whether you should or shouldn’t borrow from your TSP, we prefer to focus on an unknown cost the government charges you that most people don’t know about.
When you take out a TSP loan the government prevents you from contributing for 6 months. When we first learned about this procedure we weren’t sure of the purpose of this rule. The only thing we have been able to determine from this policy is that is saves the government money.
How the Government saves money
In order for a FERS employee to receive their matching funds on their firs 5% of TSP contributions they must contribute the 5% in each and every pay period of that year. You cannot get a match for past pay periods so there’s no way to “catch up”. Let’s take a look at a typical employee who takes a loan from their TSP and must wait the 6 months to contribute again. If this employee is making $50,000 a year the 5% match they would not receive for that 6 months would be $1,250.00. Because the employee is not contributing, the government does not have to make the match. Now take that $1,250 and multiply it over the thousands of Postal employees who take loans from the TSP and you can see the government’s motivation to prevent you from contributing for 6 months.
When you are considering taking a loan from your TSP, please consider all the costs. Missing your match on your contributions is a MAJOR HIDDEN COST we feel you should factor in to your overall decision.
We hope this helps you and do your co-workers a favor and forward this link to them. You just might save them thousands of dollars.