Do You Have Roth Money in Your TSP Account?
When you default on a TSP loan, you will owe taxes for that year on the taxable amount you did not repay, including any qualified Roth earnings. Paying taxes on qualified earnings means that you have to pay taxes today on an amount that you are otherwise already entitled to receive tax-free at retirement.

When are Taxable Distributions Declared?

The TSP will declare a taxable distribution on the entire unpaid balance of your loan plus accrued interest:

  • If you fail to repay your loan(s) in accordance with your Loan Agreement.
  • If you miss a loan payment and you do not make it up within the specified time period.
  • If you do not repay your loan when you separate from Federal service. In this case, the TSP will report a taxable distribution to the IRS and you will owe income taxes on the outstanding balance of the loan. However, you may be able to roll over the taxable amount of the distribution into an IRA or eligible employer plan with 60 days to avoid taxes and penalties.

What Amounts are Taxable?

You will owe income taxes on the taxable amount of the outstanding balance of the loan including earnings on tax-exempt contributions that were part of your traditional balance. For Roth earnings, the following conditions apply:

  • If the taxable distribution is declared because you separate from service, any qualified Roth earnings will not be subject to tax. Roth earnings that are not qualified will be subject to tax.
  • If the taxable distribution is declared for another reason (such as default on your loan), your Roth earnings will be taxed, even if they were already qualified (or eligible to be paid tax-free).
You will not owe income taxes on any part of your outstanding loan amount that consists of tax-exempt or Roth contributions.

What are the Other Consequences of a Taxable Distribution?

  • If you are under age 59½ when the taxable distribution is declared, you may also have to pay a 10% early withdrawal penalty tax.
  • A taxable distribution permanently reduces your TSP account balance.
  • A taxable distribution affects your eligibility for another loan. You cannot apply for another loan from the same account within 12 months of the date of the taxable distribution. The only exception is if the taxable distribution was declared due to separation from Federal service. If you are rehired within that 12-month period, you are immediately eligible to apply for another loan.