Ask The Experts: Money Matters

By Mike Miles

Using TSP withdrawal to pay off debt

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Q. I am soon to be 65 and plan to retire within the year and have debt in the amount of $67,000. This is not including my home, car, etc. I have been considering withdrawing a large amount from my Thrift Savings Plan to pay this debt. With my pension and Social Security benefits, if I figured correctly, I would be bringing home about what I do now after taxes. I know it’s personal preference, but is it a wise decision?

A. I can’t say if it’s the best course of action, but the debt needs to be paid. The issue is whether it’s better to take the tax hit for a lump-sum withdrawal to avoid the interest on the debt or to take monthly withdrawals to reduce the taxable income in any one year and pay the debt down over time. The correct answer will depend upon the cost of the debt and your tax returns. If you won’t significantly increase the amount of tax you’ll pay on the withdrawn TSP money by taking it all at once, it’s probably a good idea to go ahead and retire the debt.

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Using TSP to pay off home debt

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Q. I am a federal employee under CSRS and I plan to retire at age 55½. To minimize my debt, I plan to sell my current residence and relocate to a place where my income goes further. Unfortunately, my current residence is underwater by about $80,000. Would a good strategy be to withdraw the funds from TSP?

A. I can’t tell you without knowing what other alternatives are available to you. If the $80,000 is a big part of your net worth, you should do what you can to avoid it and proceed very carefully.

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TSP and debt

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Q. I have power of attorney for my military retired son who is not employed and only receiving retirement benefits, as well as undergoing a divorce. There is just not enough money to go around. I am paying what I can with his funds, but there is one large debt that there is no way to make payments on (they’ve refused what little is available) since he is only getting half of his retirement income due to the pending divorce. He has an IRA and a Thrift Savings Plan account. Would the creditor be able to take the TSP monies?

A. TSP assets are protected from creditor claims in cases of bankruptcy and civil suit.

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TSP early withdrawal and debt

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Q. I left federal service in 1998 after almost seven years. I left the Thrift Savings Plan intact and have seen it grow quite nicely. It is approximately $95,000.  My husband has been in federal service since 1995 and will most likely stay in until retirement age (we are both 49 yrs old). My husband’s TSP has also grown nicely. However, being a stay-at-home mother of five, we are seriously struggling. Our oldest child is two years away from college and our next oldest will be starting at a very expensive parochial high school in September. Our other children are 11, 9 and 3. Our biggest struggle has been credit card debt, which is now approximately $40,000. There is no realistic way that this debt will go down with our future expected expenses. I would like to cash out my TSP and use it to pay off all this debt and the remainder I would put aside for all taxes and penalties that would result. I realize that this would amount to a good chunk, but it should leave me with at least the $40,000 to pay off the credit card debt. Could this be a situation where it would be better to withdraw it now?

A. It could be, but this option should be carefully weighed against the alternatives before you act since the stakes are quite high.

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Using TSP funds to cover debt

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Q: I am a Civil Service Retirement System 50-year-old employee. I’d like to withdraw $80,000 from my Thrift Savings Plan to cover unsecured debt. Is this smart? My debt is strangling me. What is the tax hit and how can I avoid it?

A: You don’t have the option to make a withdrawal unless you can demonstrate financial hardship under the TSP’s definition. If you take a financial hardship withdrawal, you will owe tax on the amount you take and you will be subject to the 10 percent early-withdrawal penalty. You can, and should, consider taking a loan instead. Taking a loan will avoid the tax and penalty. Loans are limited to $50,000 or 50% of your account balance, whichever is lower. You can learn more at http://www.tsp.gov under the topics “In Service Withdrawals” and “TSP Loans.”

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