Background
The Thrift Savings Plan, or TSP as commonly known within the U.S. Federal Government, is the public sector equivalent to private sector’s 401(k). Congress established the TSP as part of the Federal Employees’ Retirement System Act of 1986. TSP offers the same types of savings and tax benefits as many private sector corporations offer employees under the 401(k) plans. The Federal Retirement Thrift Investment Board is responsible for administering the TSP. TSP has evolved over the years to expand its portfolio offerings to participating federal employees. However, we believe there are two areas that the Board could consider improving benefits for those with TSP accounts. These two improvements include
- Increasing the borrowing amount from $50,000 to $100,000 and
- More flexibility in borrowing from the TSP account.
We understand that many financial planners and those responsible for managing TSP or 401(k) accounts will argue that withdrawals should be the last resort. Further, there could be arguments that TSP accounts are for long-term savings and not proverbial banks to tap into at one’s leisure. We are not advocating for irresponsible withdrawals from your TSP accounts. Instead, we believe there should be changes to the TSP’s borrowing mechanism to reflect today’s changing and challenging financial environment.
Increase the borrowing limit from $50,000 to $100,000
Current Policy:
Federal employees can borrow up to $50,000 from their TSP at the prevailing interest rate. This amount is dependent on the available funds to the TSP account holder at the time of the loan request.
Proposed Change:
Increase the borrowing limit to $100,000.
What Are the Potential Benefits:
- Provides more funding to TSP account holders.
- Updates the borrowing limit to coincide with today’s financial environment as the limit has been $50,000 since its inception through the Internal Revenue Code Section 401(k), also known as the Revenue Act.
- Minimizes the need to pass special legislation or exceptions like previous situations such as the pandemic in which accountholders were allowed to borrow up to $100,000. However, the borrowing limit reverted back to $50,000 after September 22, 2020.
Allow more flexibility in borrowing purposes
Current Policy:
TSP account holders can borrow from their TSP for the purposes of either 1) real estate or 2) general.
Proposed Change:
Allow account holders to use the TSP loan in the same style as personal line of credit.
What Are The Potential Benefits:
- More flexibility in borrowing from the TSP.
- Removes the current time limit for when an account holder can borrow from their TSP. Currently, there is a waiting period for when account holders can take out a new loan out after paying off the previous loan.
- Modernizes the TSP account benefits.
- More immediate relief to account holders during situations that may impact their finances.
Conclusion
These two potential changes to the TSP would align with the broader modernization efforts within the federal workforce. Further, we believe that increasing the borrowing limit and allowing more flexibility in the form of a personal line of credit model could help federal employees. We acknowledge there may be disagreements with our suggestions as going against the spirit of the TSP. However, account holders should be provided with more flexibility to navigate the current financial environment and life changes.
We recommend that the Board consider implementing these changes as part of ongoing efforts to modernize the TSP. The Board could implement these changes at the beginning of calendar year 2026 as new TSP contribution limits start to begin. Please email us at info@ccompliancegroup.com for questions, comments, concerns, or need for clarification about improving the federal TSP.