TSP Loan Rules 2026: General Purpose, Residential, and What Happens at Retirement

Borrowing from your TSP is one of the most common moves federal employees make — and one of the most frequently misunderstood. The mechanics are straightforward: you borrow from your own account, repay via payroll deduction, and the interest goes back to you. But three hidden costs — the opportunity cost of pulling money out of a growing C Fund, the double taxation on interest payments, and the tax exposure at separation — mean a TSP loan is almost never as cheap as it looks on paper. Here's a complete picture of how TSP loans work in 2026, so you can decide whether one is the right tool for your situation.

How much you can borrow

TSP calculates your maximum loan amount as the lesser of two limits:²

• 50% of your vested account balance (or $10,000, whichever is greater), minus any current outstanding loan balance; or
• $50,000 minus the highest outstanding loan balance you carried in the past 12 months.

The $50,000 ceiling is the binding constraint for most mid-career employees with substantial balances. The 50% rule bites earlier for those with smaller accounts.

Two loans outstanding at once

You may have a maximum of two TSP loans outstanding at any time — but no more than one of them can be a residential loan. A common strategy for a home purchase: take a residential loan for down payment costs and use an existing general purpose loan for closing costs or moving expenses. You can't take a second residential loan until the first is repaid in full.

Interest rate: the G Fund rate

The interest rate on your TSP loan equals the G Fund rate for the month before your loan is approved. That rate stays fixed for the life of the loan — it doesn't adjust as the G Fund rate changes.¹

The G Fund rate for May 2026 is 4.500%.³ By comparison, a personal loan from a credit union might run 10–14%; a home equity line could be 7–8%. On that basis, 4.5% sounds attractive. But the comparison is misleading — see the opportunity cost section below.

The three hidden costs of a TSP loan

1. Opportunity cost: you earn the G Fund rate instead of your investment return

While your loan is outstanding, the borrowed dollars leave your C, S, I, or F Fund allocation and effectively sit in the G Fund earning 4.5%. If your C Fund holdings would have earned 8% over that same period, you've given up 3.5 percentage points annually on every dollar borrowed.

On a $30,000 general purpose loan with a 3-year repayment term, that 3.5-point gap compounds to roughly $3,300 in foregone growth — a hidden cost that doesn't show up anywhere in your loan statement. The higher your TSP is allocated to equities and the better the market performs during your loan period, the larger this cost.

2. Double taxation on interest

A TSP loan is often marketed as "paying interest to yourself." Technically true — but the interest payments come from your after-tax paycheck and land back in your TSP as pre-tax contributions. When you eventually withdraw that money in retirement, you pay income tax on it again. The interest is taxed twice: once when you earn it (payroll taxes before the payment leaves your paycheck), and once when you withdraw it from TSP in retirement.⁴

This isn't a reason never to take a TSP loan, but it refutes the "borrowing from yourself is free" framing. The double-tax cost on interest is real, even if modest compared to the opportunity cost.

3. Separation exposure

If you leave federal service — voluntarily, through RIF, or at retirement — with an outstanding TSP loan, the loan doesn't disappear. What happens next depends on your choice (see the separation section below), and one of those choices results in the outstanding balance being treated as taxable income, potentially with a 10% early withdrawal penalty on top. The closer you are to retirement, the more this risk matters.

Repayment mechanics

TSP loans are repaid entirely via payroll allotment — you have no option to pay by check during active employment. TSP calculates the payment amount based on your loan balance, interest rate, and repayment term; your HR office sets up the allotment deduction. Payments come out after taxes, which is what drives the double-taxation issue above.

You can repay the loan early at any time by logging into My Account on TSP.gov and making an additional lump-sum payment. There's no prepayment penalty. Extra payments reduce your principal and shorten the effective loan term, reducing both the total interest paid and the opportunity cost window.

If you miss two consecutive scheduled payments, TSP declares the loan in default. The outstanding balance is reported to the IRS as a taxable distribution on Form 1099-R. If you're under 59½ at the time of default, a 10% early withdrawal penalty applies in addition to ordinary income tax.⁴

General purpose loan: what you need to know

A general purpose loan requires no documentation of how you'll use the funds — you don't have to justify the reason to TSP. Repayment terms range from 12 to 60 months (1–5 years). The $50 processing fee is deducted from your loan proceeds, so a $20,000 general purpose loan nets you $19,950.

Processing is fully online through My Account at TSP.gov. Loans are typically approved and disbursed within 7–10 business days of submission.

Residential loan: stricter rules, longer repayment

A residential loan can only fund the purchase or construction of your primary residence — not a second home, rental property, or refinance. The property can be a house, condominium, townhouse, cooperative unit, boat, or mobile home, as long as it's your principal dwelling.²

Documentation requirements:

• Evidence of purchase costs or construction costs
• Evidence the property will be your primary residence
• Documentation must be received by TSP within 30 days of your loan request

If you fail to provide documentation within 30 days, your loan request is cancelled. The $100 processing fee (vs. $50 for general purpose) reflects this additional review. Repayment terms extend up to 180 months (15 years), which lowers the monthly payment but dramatically extends the period during which your money earns the G Fund rate instead of your full fund allocation.

Traditional vs. Roth TSP: how loans work with mixed accounts

If you have both traditional and Roth TSP balances, your loan is drawn proportionally from each — TSP does not let you specify which source to borrow from. Repayments are also applied proportionally.⁴

This matters if your Roth TSP balance is still within the 5-year seasoning period for qualified distributions. Pulling Roth contributions into a loan (and repaying them with post-tax dollars) doesn't change their tax basis, but it does complicate the bookkeeping. In practice, the impact is small for most employees, but it's worth knowing if you're close to the 5-year threshold and counting on Roth TSP for tax-free withdrawals in early retirement.

What happens to your TSP loan when you retire or separate

This is the section that matters most for federal employees approaching the end of their careers. An outstanding TSP loan at separation creates a decision point with real tax consequences.

Option 1: continue making payments

After separation, payroll deductions stop — but you can continue repaying the loan by making direct payments to TSP. You lose the automatic convenience of payroll allotment, so you must manually initiate payments through My Account. Timely payments prevent default; the loan continues under the same terms.

Option 2: repay the loan in full

You can pay off the remaining balance in a lump sum at any time after separation. This is the cleanest option: no tax event, no default risk, and your full balance is back under your investment allocation going into retirement.

Option 3: allow foreclosure (and the QPLO option)

If you don't repay the loan after separation, TSP will eventually foreclose on it — treating the outstanding balance as a distribution. The balance is reported on Form 1099-R as taxable income for the year of foreclosure. If you're under age 59½ at the time, the 10% early withdrawal penalty applies.⁴

There is a way to avoid the tax hit: the Qualified Plan Loan Offset (QPLO). If your loan is foreclosed because you separated from service, you have until your tax filing deadline — including extensions, so typically October 15 of the following year — to roll the outstanding loan balance into a traditional IRA. If you execute the rollover within that window, the distribution is treated as nontaxable.⁵

The QPLO window is a meaningful improvement over the old 60-day rollover rule, but it requires liquidity. If you can't write a check for the loan balance when the time comes, you'll owe tax (and potentially penalty) on the outstanding amount. This is one reason it's generally better to pay off a TSP loan before retirement rather than banking on the QPLO option.

GS-14 worked example: the true cost of a $40,000 TSP loan

When a TSP loan makes sense — and when it doesn't

Stronger cases for a TSP loan

• High-rate debt emergency. Carrying 20%+ credit card debt and you have no other way to pay it off. A 4.5% TSP loan is genuinely cheaper than 20% revolving credit — even accounting for opportunity cost. This is a bridge to get out from under expensive debt while you rebuild.
• No other liquid assets and a genuine cash emergency. A TSP loan is more efficient than an early withdrawal (which is permanent and immediately taxable) when you'll repay the funds within 5 years.
• Down payment with a clear payoff plan. Residential loan for a home purchase, well before retirement, with 15 years to repay. The leverage on the real estate may outperform the TSP opportunity cost — but model it carefully.

Weaker cases — think before borrowing

• Within 5 years of retirement. If you can't repay before you separate, you'll face the foreclosure-or-QPLO decision at the worst time. Repay or avoid entirely.
• Market is down and you hold equities. Borrowing from a depressed TSP locks in paper losses and removes shares from participating in the recovery. You're selling low and "buying back high" as you repay.
• Discretionary spending. A vacation, car upgrade, or elective renovation. The hidden cost is real even if the cash flow looks manageable. The TSP is the most tax-advantaged account you'll ever have — be reluctant to disrupt compound growth in it.
• You already have a TSP loan outstanding. Carrying two loans means two payroll deductions and two opportunity cost windows running simultaneously. Ask whether the purpose is truly necessary.

How to apply for a TSP loan in 2026

1. Log in to TSP.gov and navigate to My Account → Loans.
2. Select loan type (general purpose or residential).
3. Enter the loan amount and repayment period.
4. For residential loans, submit required documentation within 30 days.
5. Review the Loan Agreement — it shows your exact monthly payment, interest rate, and total interest.
6. Approve and submit. Funds are disbursed to your bank account on file within approximately 7–10 business days.

Your payroll office is notified automatically; you don't need to initiate the payroll deduction setup separately.