TSP Features for Civilians

Chapter 11 Double Taxation

Some participants ask about the “double taxation” of the interest portion of their loan payments. Here is the reason why this occurs.

When Congress enacted the Tax Reform Act of 1986, it specifically provided that “no deduction is allowed with respect to interest paid on [a loan from a qualified plan like the TSP]” and “no basis is allowed with respect to any interest paid on a loan from a qualified plan [like the TSP].” H.R. Rep. No. 99-841, at II-465 (1986) (Conf. Rep.) as reprinted in 1986 U.S.C.C.A.N. 4075, 4553; Internal Revenue Code § 72(p).

This means Congress decided that a participant paying interest on a plan loan will pay income taxes twice: once when the participant pays the interest with after-tax dollars and again when the interest is distributed from the participant’s account.