An outstanding TSP loan at separation from federal service has to be addressed within 90 days. Payments must be set up from another account in that window, or the loan is foreclosed and treated as a taxable distribution added to that year's income. A 10% early withdrawal penalty may also apply if the borrower is under 59½ at the time.
Video Transcript
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TSP loans are pretty common during a federal career, but what happens to that loan when you separate is something a lot of people don't think about until it's too late to do much about it.
The rules have changed. If you have an outstanding TSP loan when you separate from the federal service, you must set up payments from another account within 90 days of separation, or the loan is foreclosed and treated as a taxable distribution. That means the remaining balance gets added to your taxable income for that year. And if you're under 59 and a half at that time, you may also owe the 10% early withdrawal penalty on top of that.
It's one of the things that can catch people off guard during the transition out of federal service. If you have an active TSP loan, the time to understand your options is before you separate, not after. Make sure you speak with an advisor who understands the TSP to figure out how to best manage a loan situation.
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