Q. I am looking for a clear answer in regard to TSP home loans. I am considering retirement in the next year. I am eligible to retire today. If I utilize a TSP home loan now for my primary residence (and planned retirement residence) and retire before the loan is paid in full, will I be hit with a penalty? Can I utilize a one-time payout at time of retirement to pay the loan in full without incurring a penalty?
A. If you take the loan and do not repay it within 90 days of separating from service, it will be declared a taxable distribution. Whether or not this declared distribution will trigger the early withdrawal penalty will depend upon the circumstances that apply at the time. While you may take a withdrawal from the TSP to repay the loan, the early withdrawal rules apply in either case, so the only difference will be the timing of the withdrawal. Since you did not provide enough information for me to determine the relevant circumstances, I’ll refer you to the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. The early withdrawal penalty will apply to your distribution — whether declared or on request — unless you qualify for one of the exceptions listed on the left side of Page 7.