Ask The Experts: Money Matters

By Mike Miles

Default on TSP loan

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Q. I am three years away from retiring (active-duty military officer) and have some credit card debt I would like to pay off before leaving active duty. I am not eligible for a TSP hardship withdrawal because of my income. What would happen if I take out a TSP loan and intentionally not pay it back? I understand I would be responsible for it becoming a taxable distribution and a 10 percent early withdrawal fee, but would there be any other negative effects against me or my credit? Would it even be ethical? Read the rest of this entry »

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TSP residential loan

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Q. What happens if the down payment made is less than the amount of a TSP residential loan? Would the borrower have to claim the difference as a withdrawal and pay the penalty and claim as income?

A. I don’t believe that there is a requirement to commit the entire loan to the down payment, but you should consult your tax preparer to be sure.

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Age-based withdrawal

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Q. I am 57 with 20 years of service and don’t plan on retiring for at least 5 years. I would like to take out a TSP loan, then when I turn 59½ take an age-based disbursement for enough to pay back the balance of the loan and have some money left over. Can I do it that way? Or would I be required to pay off the loan before getting an age-based disbursement? I would think they would just deduct the amount of money I still owe from the disbursement. For example, say I took out a $50,000 loan now. In 2½ years I’d still owe about $25,000 to $30,000. Could I take my one-time, age-based disbursement of say $100,000 with the loan balance deducted from that amount? Read the rest of this entry »

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TSP loan

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Q. Regarding my TSP loan, I have a balance due of approximately $9,500 with a payoff date in just over two years paying $175 every two weeks. I also contribute 5 percent to my Thrift Savings Plan, which is approximately $160 per pay period. I would love to pay off my TSP loan sooner so that I could then concentrate on paying off other debt that I have (two years left on auto loan; balance of $12,000 at 2 percent). I can’t afford for my net pay to decrease anymore right now, so I am wondering if it would make sense to reduce or cancel my TSP contributions temporarily and then put that amount toward the TSP loan, which should enable me to pay it off in just over one year?

A. That’s one option, but given the attractive terms for your auto loan, you’ll probably be better off continuing to fund your TSP contributions and paying off the auto and TSP loans on schedule.

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TSP loan

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Q. The Air Force is going through a drawdown because of sequestration. If a person has a current Thrift Savings Plan loan and is involuntary retired earlier than the minimum 20 years for military service, what are their TSP loan options? Are they required to immediately pay this back, or will they still have the option to pay the loan back over time? Also, how does joining the civil service affect the TSP account?

A. You will be required to repay any outstanding loan balance within 90 days of separation, or the unpaid balance will be declared a taxable distribution.

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Early withdrawal penalty?

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Q. I retired under a Voluntary Early Retirement Authority from the Department of Agriculture in July at age 56. I chose to receive monthly payments from my Thrift Savings Plan account. I would like to pay off my mortgage and a student loan. The only thing I can come up with is to transfer my TSP funds into an IRA and withdraw from the IRA. If I roll my TSP funds into a traditional IRA and make withdrawals before 59½, will I be subject to the 10 percent early withdrawal penalty?

A. Yes, I believe you will, but you should check with your tax preparer to be sure.

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TSP loan

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Q. I’m planning on retiring this year at age 62 under FERS. I will have an outstanding Thrift Savings Plan loan balance of $16,000 and was not planning on repaying the rest of the balance and was needing to find out if the outstanding balance will be considered income and taxed with my other income for the year at the end of the year, since it will be tagged as taxable distribution?

A. Yes, any loan balance outstanding 90 days after separation will be declared a taxable distribution at that time and reported as ordinary income for that year.

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TSP loan

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Q. I am a federal employee who will be retiring Jan. 3 after 40 years of service at age 58½. I took a necessary loan on my Thrift Savings Plan and will still have a balance on my loan when I retire. I understand I have 90 days to pay back the loan or I will be taxed for the money owed.

I do not need my TSP money now. I would like to keep it there or invest somehow, not sure yet. I do not want to pay the money back, which makes no sense to me since I can take money from my TSP anytime now once I retire without a penalty. Do you think I will be better off to pay the money back to myself to avoid the taxes?

A. I generally recommend that you leave your money in the TSP and invest it there for as long as possible and practical. If you don’t repay the loan, you will not be able to return the money to the TSP later. You should repay the loan unless there is a good reason not to.

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TSP loan

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Q. I am 61 years old and have a Thrift Savings Plan loan of $24,000 and over $60,000 remaining in my TSP account. I applied for a Voluntary Early Retirement Authority/Voluntary Separation Incentive Pay at my human resources office awaiting approval. What happens to my TSP loan and to my remaining balance in my account if I request a full withdrawal when my retirement is approved? Does the remaining balance of my TSP loan gets paid up from my remaining balance and incur penalty for the full withdrawal?

A. If you don’t repay your loan within 90 days of the day your agency notifies the TSP of your separation from service, the outstanding balance due will be declared a taxable distribution. If you request a lump-sum withdrawal of your entire TSP balance at retirement, you’ll pay tax on the remaining balance and the un-repaid loan amount due.

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TSP cashout and student loan repayment

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Q. I am a civilian employee. I have FERS and the Thrift Savings Plan. Is there any provision that would allow me to cash out my TSP for it to be applied directly to my federal student loans without any type of penalty?

A. Check the list of exceptions on Page 7 of the notice at https://www.tsp.gov/PDF/formspubs/tsp-536.pdf. Student loan repayment is not the basis for an exception to the early withdrawal penalty.

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