Your Thrift Savings Plan Is Not a Christmas Club Account

By FINRA Investor Education Foundation Staff

Need some extra spending money for the holidays? You may want to consider a Christmas Club account. Remember those? Although Christmas Club accounts aren’t often talked about these days, their purpose is wise: keep the saver out of debt at the holidays. By saving systematically throughout the year, that money can be used to keep Santa in the green.

It may have crossed your mind to supplement your holiday cash by tapping into your Thrift Savings Plan (TSP) or even your spouse’s 401(k). Generally speaking, as long as you are employed by the federal government or a member of the uniformed services, the law permits borrowing of up to half the value or up to a maximum of $50,000 (whichever is smaller) from a TSP account.

Think again. There are costs and potential pitfalls to retirement readiness if you borrow money from your TSP, or take what is known as an in-service withdrawal.

Just because the law permits borrowing from the TSP doesn’t mean it’s a good idea. Here’s why.

  • A $50 loan fee is charged to administer any loan you take. If you arrange to borrow $1,000 (the minimum loan amount in the TSP), you’ll receive only $950 in cash.
  • The loan must be repaid with interest (at the G Fund rate at the time your loan application was processed; currently 2%), and usually within five years.
  • If it isn’t repaid in full within the required time period, the unpaid balance and accrued interest are subject to taxes and a potential early-withdrawal penalty.
  • If you leave federal service with an outstanding TSP loan balance, the remaining loan amount must be repaid within 90 days.

Perhaps the most detrimental impact: you don’t earn any return on the money you borrow until the amount has been paid back. This makes it harder to meet your retirement savings goal.

And don’t even think about using an in-service withdrawal to spend on holiday cheer, or for most any other purpose. Such a withdrawal permanently reduces your retirement nest egg. You incur immediate tax liabilities and possibly a 10 percent penalty. The TSP offers a comparison chart to help you see how a loan or withdrawal would affect your account.   

Instead of raiding your retirement funds, consider opening a savings account at your financial institution and making regular deposits to prepare for your holiday needs. It may be a little late for this season, but the 2016 holidays are right around the corner. Set a goal to save for future needs.

Remember, your TSP is not a Christmas Club Account. Retirement savings are for retirement!

Need some advice about tracking your spending? can help.


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