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Ed, I am a federal government employee. I took out a TSP…

Hello Ed,I am a federal...
Hello Ed,I am a federal government employee. I took out a TSP loan of $15,000 in January of this year. I currently reside in Maryland. I have two questions.Will I be penalized for taking out the loan when I file my taxes in the spring, and if so, what would the estimated amount be?Also, I am planning on leaving the federal service. Would I be able to pay off the remaining balance of the loan with a taxable distribution, and if so, what would that estimated amount be?I am single with no children and am a renter.Thanks for the insight you can provide me.
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Answered in 5 minutes by:
10/11/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,339
Experience: Taxes, Immigration, Labor Relations
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Hi and welcome to our site!

The loan itself is NOT taxable as long as it is realistically expected to be paid back.

The TSP Loan program allows you to borrow money from your account while you are employed by the Federal Government or while you are a member of the uniformed services.

You must repay your loan with interest. Repayments for the loan and interest are generally made through payroll deductions. Your repayments restore the amount of your loan, plus interest, to your account.

If you failed to repay or no longer employed - the loan balance will be deemed distribution and becomes taxable at this moment.

ONLY in this case it will be reported as distribution on form 1099R and will be subject to addition 10% early distribution tax if you are below 59 1/2.

Questions?

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Customer reply replied 4 months ago
Thank you for your response. I forgot to disclose that I am 30 years old. Does that change anything?

That will not make any difference if you will continue to repay that loan out of your paychecks.

Still the loan will not be taxable income.

If however - your stop working - you are expected to pay back the remaining balance immediately.

If that happens and you would not have funds - the remaining balance will be treated as distribution and reported as taxable income.

In this case it will be added to your other taxable income and taxed all together.

As you 30 - there will be additional 10% penalty.

.

But as long as you are working and continue to pay back that loan out of your paychecks - you would not have any issues.

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Customer reply replied 4 months ago
Okay, makes much better sense to me now. Thank you so much for your help.

I appreciate if you take a moment to rate the answer.

Experts are ONLY credited when answers are rated positively.

If you still have any doubts, need clarification - please be sure to ask.

I am here to help you with all Social Security / Tax related issues.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,339
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