A TSP loan is often described as borrowing from “your own account,” which is technically true but practically misleading when the account holds both Traditional and Roth balances. The TSP applies a pro-rata rule to every loan, and the rule is the same on the way in, on the way out, and in any later trouble.

The pro-rata rule is the most important tax mechanic in the TSP loan system, and it is the one most borrowers have never heard of.

The pro-rata rule, stated simply.

When you take a TSP loan, the loan amount is treated as coming out of your Traditional and Roth balances in proportion to their share of your total TSP balance on the day the loan is processed. If 70% of your balance is Traditional and 30% is Roth, then 70% of your loan comes from Traditional money and 30% comes from Roth money.

The same pro-rata rule applies to repayments. As you repay the loan through payroll deduction, each repayment is split between Traditional and Roth in the same proportion.

You cannot elect to draw a loan only from Traditional money, or only from Roth money, or to repay only against one side of the account. The pro-rata rule is the only mechanism the TSP supports for loans.

What this means at issuance.

At loan issuance, the pro-rata treatment is generally benign. The money is your own either way — it comes from your account, it goes back to your account, and the tax character of the loan matches the tax character of the underlying dollars.

For a participant whose Traditional and Roth mix is stable across the life of the loan, the pro-rata rule never produces an unwanted surprise. The loan closes cleanly, and the repayment restores the same pro-rata mix that was there before.

For a participant whose Traditional and Roth mix shifts during the loan — for example, because new contributions are going entirely to Roth, or because of an in-plan Roth conversion — the pro-rata rule can produce an outcome that surprises them.

What this means at repayment.

The repayment pro-rata is calculated based on the Traditional/Roth mix at the time of each repayment. If your balance mix has shifted during the loan (because of market movements, new contributions, or withdrawals), the pro-rata split of each repayment shifts with it.

The practical consequence: a participant who has been making 100% Roth contributions during the loan will see more of each repayment flow back to Roth than they would have under the original pro-rata. The reverse is also true. The loan is, in effect, recalibrating with each payment.

For most borrowers, this recalibration is invisible. For borrowers who are tracking their Roth balance carefully for tax planning reasons (for example, managing IRMAA thresholds or planning future Roth conversions), the recalibration can produce an unexpected accounting outcome.

What this means on a deemed distribution.

The most consequential moment for the pro-rata rule is the deemed distribution — the moment a loan is declared taxable because the borrower separated from service without repaying, or because the loan defaulted.

At that moment, the unpaid balance is split pro-rata between Traditional and Roth based on the current balance mix, not the mix at the time the loan was issued. The Traditional portion of the unpaid balance is reported as ordinary income on Form 1099-R and is fully taxable. The Roth portion is also reportable, but its tax treatment depends on whether the Roth 5-year clock has been satisfied.

This is where the pro-rata rule becomes a real problem. A borrower who has been contributing only to Roth for years — and who assumed that any TSP loan trouble would produce a Roth-only tax consequence — can find that the deemed distribution has a substantial Traditional component, simply because the original balance mix at the time the loan was issued was heavily Traditional.

The Roth 5-year clock.

For the Roth portion of a deemed distribution, the Roth 5-year clock is what determines whether the earnings portion is qualified (tax-free). The clock starts on January 1 of the tax year for which the first Roth contribution was made to any Roth account the participant holds.

If the 5-year clock has been satisfied at the time of the deemed distribution, the Roth portion of the unpaid balance is tax-free. If the clock has not been satisfied, the earnings portion of the Roth deemed distribution is taxable (and subject to the 10% early withdrawal penalty, if applicable).

The interaction with in-plan Roth conversions.

Participants who have executed in-plan Roth conversions during the loan period face an additional wrinkle. The conversion increases the Roth balance and decreases the Traditional balance, which changes the pro-rata mix that applies to subsequent loan repayments and to any future deemed distribution.

For a participant who converts a large Traditional balance to Roth mid-loan, the deemed distribution at the end of the loan can shift heavily toward Roth — which sounds favorable, but the Roth 5-year clock applicable to the converted dollars is its own consideration. A conversion executed in 2024, for example, has a 5-year clock that runs until January 1, 2029. A deemed distribution in 2026 involving those converted dollars can produce taxable earnings on the Roth side.

How to plan around it.

The pro-rata rule is mechanical, and the TSP does not negotiate it. But you can plan around it:

  • Take the loan at a stable mix. If you know your Traditional/Roth mix is going to shift significantly in the next 12 months, take the loan after the shift rather than before. The pro-rata calculation will reflect the post-shift mix.
  • Avoid Roth conversions during an active loan. A mid-loan conversion changes the pro-rata calculation and can produce a Roth component in a future deemed distribution that would otherwise have been Traditional.
  • Close the loan before any major rebalancing. If you are planning a Roth conversion or a major withdrawal that will shift the Traditional/Roth mix, do it after the loan is repaid.

None of these strategies avoid the pro-rata rule. They just put the rule in the least harmful position.

The honest bottom line.

The pro-rata rule is one of the most underappreciated mechanics in the entire TSP system. It is not the kind of thing that comes up in a casual conversation about TSP loans, and it is not the kind of thing the TSP prominently highlights in its loan disclosures. But it governs every dollar of every TSP loan for the entire life of the loan, and it determines the tax character of any future trouble.

If you are carrying a TSP loan and you are planning any Roth conversion, withdrawal, or balance shift in the next few years, the pro-rata rule is the part to understand before you take the action.