Ask The Experts: Money Matters

By Mike Miles

TSP residential loan

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Q. I am a longtime CSRS employee with a pretty good Thrift Savings Plan balance. I plan to retire in two years and move to another city when I retire. My spouse is planning to retire in eight months, and we are planning to buy a house in the new city. We would like to buy the new house and begin the transition to the new city without selling our existing home until I retire. We are looking at a number of ways to finance the purchase of the new home and afford a mortgage payment on that house, a mortgage that we should be able to substantially pay off with the proceeds of the sale of our existing home two years from now. I am looking at ways to keep the payments lower and am considering either taking an over-59½ withdrawal from my TSP account or taking a loan. I am considering withdrawing or borrowing an amount equal to about 25 percent of the balance. If I take the withdrawal now, I use up the one-time allowance to take part of the balance and incur immediate tax bills for the amount withdrawn. If, instead, I take an equal amount out as a loan, I do not lose the ability later to withdraw part of my TSP and I don’t create an immediate tax liability.

Because I am CSRS, the loan wouldn’t affect a TSP match that would come if I were a FERS employee.  The question is really whether or not I am eligible for a residential loan from TSP. The loan requirements are that it be for a “primary residence.” I assume this means I can’t use this loan program for a vacation home.  The house that we would purchase using this loan as part of the down payment will be our principal home two years from now. Would the fact that we are not immediately selling our existing home mean that we cannot use this loan provision? Or does the fact that this will be our principal home in the future allow us to use this loan provision?

A. Like everyone who’s requesting a residential loan, you will be requesting the loan for the purchase of a house that will become your primary residence. How many people are living in the house they’re trying to buy when they request their loan?

The question is really about the timing, and I think you’ll have to submit a loan application to find out for sure. If you’re planning to rent the new home between now and the time you take occupancy, you may have a harder time justifying your application. If practical, you can fall back to a general purpose loan as your “Plan B.”

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TSP loan and personal debt-to-income ratio

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Q. 1. I have $12,000 in student loans at about 6.5 percent interest rates. I had considered taking a loan from my Thrift Savings Plan account to pay off my balance as the interest rate I would pay back on the TSP loan is lower than my Stafford Loans. What is the maximum amount one can take out on loan from their TSP account? What is the repayment time frame demanded by TSP?

2. If I were able to pay off my Stafford loans with a TSP loan, I am not sure that would be the best decision. I am 26 years old and have approximately $15,000 in TSP. I know that money makes money over time and I can’t make up past years. If I take the funds out, I am losing some potential for the funds to work for me and increase themselves. Do I want to leave the money brewing where it is in the hopes it will bring more for my retirement, or take it out now and be debt-free and save myself some interest from my student loans. Are there any other factors that merit consideration?

3. I am looking into buying a house and want to know if a loan from my TSP account shows as part of my debt-to-income ratio. I have been considering taking out a TSP loan to pay down my student loans to lower my debt-to-income ratio to improve my home loan prequalification odds. Can you tell me if a TSP loan would be part of that ratio even though the loan is paid back to myself?

A. The maximum TSP general purpose loan amount is the smaller of 50 percent of your 12-month rolling average account balance or $50,000. The repayment period is five years, but you may reamortize the balance to extend the repayment term.

Whether or not you take the TSP loan depends upon a number of factors including the cost of the other debt, the cost of the TSP loan and your behavior.

You should check with your lender to see what, exactly, they count in underwriting your mortgage application. I suspect that they’ll want to consider all of your debt.

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Retirement questions

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Q. I have selected a retirement date of June 28, 2014. I will be 59½ years old with 33½ years of government service. I have been FERS my whole career. I have $365,000 in my Thrift Savings Plan. I will retire with a high-3 at GS-13, Step 4 and a 16.51 percent locality pay. I am debating paying off my mortgage on my retirement home by taking a partial withdrawal from my TSP.

The reasons for this are:

1) Escrow of property taxes

2) Flood insurance imposed by Dodd-Frank

3) Desire to be mortgage-free in retirement.

I owe $185,000 on my mortgage. I am single and will have no other debt once I retire. Does this make sense? What are the tax liability consequences if I pay off the mortgage in July 2014?

My TSP distribution is 50 percent C Fund, 25 percent L2020, 15 percent S Fund, and 10 percent G Fund. I am only able to fund my TSP at 5 percent to take advantage of matching funds. Would you recommend a more conservative distribution at this point in my career or continue with this risk model that I have been comfortable with for several years?

I have enclosed my most recent annuity estimates from my human resources center.

Also, if I were to marry after retirement what is the policy for covering my future spouse on my Federal Employees Health Benefits? If I choose a survivor benefit for my future spouse, is it possible to change from a self-only pension to one with survivor benefits?

A. You’re asking for personal financial decision support, which I can’t provide without an engagement agreement and some analytic work. If you’d like to consider hiring me to do the work necessary to answer your questions about using the TSP to pay off your mortgage and how you should invest your TSP to support your goals, visit www.variplan.com.

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Disability retirement

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Q. I am being considered for disability retirement in the coming months. My application is pending consideration from the Office of Personnel Management. I am a GS-14 FERS employee, 54 years old, with about 32 years of service. I have approximately $250,000 in the Thrift Savings Plan, and my allocations are as follows: 15 percent C, 15 percent S and 70 percent I. I realize that is somewhat aggressive, but it has been like that for about seven years or so, and I have been hopeful of the international home run. Regrettably, this hasn’t necessarily come to fruition. I will likely shelter some of my remaining funds in G or F when I find out if my retirement is approved.

If I should retire, I plan to withdraw approximately $150,000 to pay off my mortgage. Therefore, should something happen to me or if the market fails, at least my home is paid for. I will have a reasonable annuity, and my wife draws $1,800 monthly as a service-connected disabled veteran. Combined, I feel we will have adequate income, especially when our mortgage of $1,000 per month is satisfied. Not rich, but with no real debt ($15,000 vehicle loan) consistent income and no mortgage. Sounds OK to me. Or am I off-base?

A. I think that what’s off-base is that, like too many investors, you are willing to gamble — without knowing the odds — with your life savings. If you’re not willing or able to prudently manage the money, then it’s probably your safest bet to use it to pay off your mortgage. At least you won’t lose it overnight. This might mean that later on, however, if you need the money to pay your bills, it won’t be available. There is no easy answer. That’s why I’m in business. If you’d like to discuss your options, you can contact me through www.variplan.com.

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Early retirement, mortgage and TSP withdrawals

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Q. I am taking the Voluntary Early Retirement Authority from the Postal Service and am trying to decide how to withdraw funds from my Thrift Savings Plan. I have about $300,000 in my account and have a mortgage of $150,000 with about 10 years until payoff. Should I take a lump sum and pay off my mortgage and keep the remaining money in TSP? Or should I just start withdrawing approximately $2,000 monthly to cover mortgage payments? I am afraid if I pay off my mortgage, the tax hit would be to great.

A. I suggest that, as long as your mortgage interest rate is competitive, and unless you can find a good reason to do otherwise, you should make the payments and minimize the withdrawals from your TSP. You might even consider refinancing your mortgage into a 30-year fixed rate, if possible, to reduce your payments and further protect your TSP balance.

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Mortgage and taxes

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Q. I turned 62 in December. I am 100 percent disabled from combat wounds.  I worked federally for a while and saved $102,000 in a G Fund under FERS. I’m about to start losing my home as my wife will have to retire this year. Without her income, we won’t be able to afford the mortgage (but no credit card or other debt on the house.)

What percentage at age 62 does a 100 percent disabled vet have to pay when withdrawing savings in full?  I think it’s stating 20 percent, but that doesn’t seem reasonable. Am I reading it wrong? I want to pay down my home and refinance to lower the payment to keep from going into default and losing it. It’s all we have, and with the market crash, we lost what equity we had in it. We both have AAA credit scores (low 800s) and have held on as long as we can, but the recession and times have finally caught up to us.

Can you explain what would be the best way to pull the money out in full so I can pay off my mortgage and keep my home?

A. While you may wind up owing less when you file your tax return, there will be 20 percent withheld from your distribution against your federal tax liability.

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Roll TSP into IRA?

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Q. In 2011, following 18 years of government service at age 60, my excepted service position ended unexpectedly. My retirement pension is small: $589. My first payment arrived February. I had $10,000 in savings with Fidelity but used that to live on, considering the lack of income for two to three months and basic living requirements: mortgage, insurance, car payments, son leaving for college, etc.

I paid taxes on that money, approximately $3,000 or more. That money is now gone.

When I retired, I had two Thrift Savings Plan loans that were rolled in as income on my taxes. They are paid in full.

I am still seeking full-time employment. I have a part-time job that has been extending me extra hours.

My TSP account has approximately $80,000 remaining. Should I roll that over to an IRA? Am I able to borrow from that account to pay off bills? I have approximately $13,000 in bills: car, three credit card accounts (none over $3,000). This does not include mortgage/homeowners’ association/condo fees, water, electric, home-car insurance, food, etc.

I hope to work until 66 before applying for Social Security. I have one child in grad school who constantly needs financial assistance. What’s the best for me to do?

A. You should avoid moving your TSP money to an IRA, since you’ll lose it’s low-cost advantage and access to the G Fund. You may not borrow from your TSP account since you are no longer eligible to contribute. You may initiate automatic monthly distributions from your TSP account and then change the amount of those distributions once each year. Visit www.tsp.gov for more information.

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Loan repayment

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Q. On June 26, I took out a $22,000 loan against my 401(k) plan for major home improvements. That equaled up to $376 per month taken out of my paycheck to repay this loan. Then, Aug. 1, my hours were temporarily reduced until the end of 2012 to 30 hours per week, which amounts to an additional  $620 deducted from my pay monthly. This puts a serious hardship on my ability to pay my monthly obligations. Is there a way to legally stop payments to my 401(k) repayment, seeing as I had no idea my hours would be reduced, whereby affecting my ability to pay my monthly obligations, including my mortgage?

A. You may be able to re-amortize the loan to extend the term and decrease the payments. If you default on the loan, the unpaid balance due will be declared a taxable distribution from your account. While this may not be attractive, it’s not the end of the world.

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Tax strategy for transferring TSP

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Q. I’m a FERS retiree, age 64, with a $36,000 annual pension. My spouse has a $40,000 annual salary. We have a rental property that brings us $24,000 a year. And we have a home mortgage balance of $500,000. Our living expenses so far do not require me to withdraw my $600,000 Thrift Savings Plan fund. I plan to live until age 85.

As I approach age 70½ with minimum distribution, what is the best tax strategy for transferring the $600,000 from the TSP into a private investment account? A lump-sum rollover into a Roth account after paying the taxes? A calculated annual withdrawal that would not push me into the next higher tax rate?  Should I start withdrawing now at age 64 or wait until age 70? What type of private investment accounts best mirror the TSP accounts?

A. I suggest that your default approach should be to take the required minimum distribution and only take more, or withdraw the money sooner than necessary, if something compels you to do so. Finding a compelling case is up to you and your tax preparer. The closest things you’ll find to TSP funds, outside of the TSP, are Exchange Traded index Funds, or ETFs. iShares is the leader in these, but they are produced by a variety of firms, including Vanguard. iShares comps for the TSP funds are: IVV for the C Fund, IWM for the S Fund, EFA for the I Fund and AGG for the F Fund. Unfortunately, there is no equivalent for the G Fund, which is one of the arguments for sticking with the TSP for as long as possible.

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TSP withdrawal or personal loan?

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Q. I am 61½ years old. I want to pay my mortgage off. I am losing my contract job and need to lower my debt.   I have saved up all but $30,000. If I withdraw that from my Thrift Savings Plan, how much in federal taxes will I have to pay? Would it be better to get a personal loan?

A. Your TSP withdrawal will be added to your income for the year and taxed at your marginal tax rate for the year. You’ll need to prepare a pro-forma tax return to estimate the amount you’ll owe. It’s impossible to say, without more rigorous analysis, whether or not a personal loan would be a better solution.

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