Ask The Experts: Money Matters

By Mike Miles

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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Mortgage and C Fund

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Q. I retired Jan. 31, 2013. I have more than four years left on my mortgage. I owe about $25,000 on my loan. I was thinking of taking a lump sum from my Thrift Savings Plan for about $20,000 and use my tax refund to make up the difference I would owe. I have about $120,000 in my TSP. I’ve had it in the C Fund, which is doing very well. Do you think it’s a good idea to take a lump-sum withdrawal to pay off my mortgage? It would save me $900 per month, which is what I’m paying for my mortgage.

A. If you plan to leave all of your money in the C Fund going forward, it might be smart to use some of it now to pay off your mortgage before you lose it. You should note that the C Fund isn’t “doing very well,” it has done very well. Those are two different things. The question you should asking is: “What could it do in the future?” Since 2000, it has lost half of its value – twice.

The best decision about your mortgage will depend upon a number of factors, including your tax returns, how you will manage the money going forward if it’s not used to pay off your mortgage, the terms of your current mortgage and the demands you will place on your TSP account in the future.

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Using TSP funds to pay off mortgage

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Q. I am thinking of retiring in about a year and will have approximately $310,000 in my Thrift Savings Plan account. The remaining cost of my mortgage is going to be about $140,000. Is using the TSP funds to pay off the mortgage an option? How much would I be taxed if I opted to go this route? If this does not sound smart, please suggest a smarter idea that I might use.

A. It is an option, but the money will be taxed as ordinary income and may be subject to the early withdrawal penalty, depending on your age. If the interest rate on your mortgage is well above the current market rate, then you may want to consider doing this. If not, I think you should leave your money in the TSP as long as you can. You can set up monthly distributions to support your retirement spending needs, if necessary.

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Payment to state required for TSP withdrawal?

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Q. I’m planning on a FERS retirement at the end of December 2014. At that time, I’ll have already met the minimum retirement age and will have credit for 32 years of service. I’ve read that I can withdraw funds from the Thrift Savings Plan without an early withdrawal penalty upon my retirement, and that approximately 20 percent will be withheld for federal taxes, but what I don’t know and can’t seem to find is the amount of money that will need to be paid to my state of residence, West Virginia. My plan is to use the money in my account to pay off a mortgage and other debts, and leave the remainder in a savings account. Are there any other issues I should be concerned about?

A. I can’t comment on your plan of action, since I don’t know nearly enough about your circumstances and objectives. There is no withholding from your TSP withdrawals required for state income taxes. The amount that you will ultimately owe West Virginia for taxes can only be determined by preparing your tax return for the year. A tax preparer should be able to give you an estimate if you want to make estimated tax payments or request state tax withholding.

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Pay off mortgage with TSP?

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Q. I know that you say (almost always) not to pay off the mortgage on retirement with Thrift Savings Plan funds. So when it is a good idea to do so? I’m CSRS Offset ending at GS-14, Step 8 with 32 years of service, $300,000 in TSP, $30,000 in cash on hand, will have no credit card or vehicle debt shortly as we are selling an investment property (taking the tax hit instead of identifying a new investment property because I really don’t want to be a landlord anymore), the usual monthly expenses, and will get the law enforcement/firefighter retirement benefit bump (did my 20, then moved to a noncovered position). I am 60 (and, at 62, the offset kicks in, and beyond my way of thinking, will increase my monthly pension).

We owe about $100,000 on the 6 percent rate 15-year mortgage that has 10 remaining years. We plan on selling the house in six years when the last kid leaves for college and downsizing into a condo up the street for about $300,000. The house will sell for around $600,000+ (100+ year old historic neighborhood, prices and sales were barely affected during the recession so these numbers are pretty solid). The caveat is, we are restoring this historic house ourselves (this is the third one that we have done) and put $1,000 to $2,000 a month in parts or subcontractors for the renovation and probably have about 36 months left of work on weekends to finish the house ($36,000 to $50,000).

The calculator says my retirement income after adjusting my life insurance, tax adjustments (I claim zero now cause I am a lousy-saving person and get $10,000 average back every year) will be 87 dollars less a pay period than what I take home now (without touching the TSP). So the reason for paying off the mortgage is my wife, who works in social work at a low wage, can quit working as not having the mortgage (paid off with TSP funds)  will make up for about half of what she brings in and then help me swing a hammer and finish the house and party a bit more. On a final note, we have not taken out old-age insurance for care.

A. You’ve identified an objective: To take a lump sum from our TSP account to pay off your mortgage. So the question is whether or not this is a safe — and, if safe, an optimal thing to do, given your current circumstances and future goals. Unfortunately, it’s not possible to answer this question responsibly without analyzing it in the context of your lifetime plans. Visit my website and and contact me if you’d like to discuss your needs further.

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Withdrawal to pay off home

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Q. I am retiring Aug. 30 and would like to pay my home off at this time. I have $107,000 in my account and the payoff for my home would be roughly $49,000. I plan to let the remaining balance stay there until 62 and receive monthly payments. My retirement is listed under FERS and, at 62, I will get Social Security (I have worked in the private sector for more than 30 years and expect my retirement pay to be nothing less than $1,000 a month, for a total income of at least $2,600 a month. Does this seem like a bad move if I pull out $49,000?

A. The question is how this move will fit into an overall planning and management scheme, and whether there are other options that are likely to produce better results, within the context of that scheme, than the withdrawal and payoff. The terms of your current mortgage are critical to framing the decision for analysis.

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70½ options

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Q. My husband (retired FERS) turned 70 in March and has more than $200,000 in the Thrift Savings Plan. Our understanding is that he must begin withdrawal by April 2013. We owe $100,000 on our home. Is it better to take out enough to pay off the house or schedule the minimum monthly withdrawal?

A. The smart move will depend upon your mortgage terms and how you manage the TSP money. If I were responsible for the outcome, I’d prefer to see you continue the mortgage, if it’s at a market fixed rate, and take the required minimum distribution from the TSP account.

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Asset allocation

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Q. I am a CSRS employee with 38 years of government service. So far, I have my funds spread over all of the funds: 45 percent in G and 30 percent in F. Is this wise considering I intend to retire in fiscal year 2013? Also, is it wise to take funds from my Thrift Savings Plan and just pay off one of my two mortgages? The mortgage rates are 4.5 percent and 5 percent. I’d like to pay off the 5 percent mortgage, which is about $150,000. Is this wise? If not, why not?

A. Your asset allocation makes no sense. It only lists two of the five funds and the percentages don’t add up to 100 percent, so I can’t help you there. I suggest that if you don’t know what to do, consider using the L Fund that most closely corresponds to your life expectancy.

As for the mortgage, if I were managing your financial plan, I would lean against paying off the mortgage since it will impair your portfolio’s liquidity and may tie up money you’ll need later for expenses. You’ll have to decide what makes sense to you. There is no universally “wise” choice.

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Pay off refinanced mortgage or max out Roth TSP?

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Q. I’m a 45-year-old reservist who has been recalled to active duty. I’m also an E-6 with more than 18 years of service.

I can afford to invest my entire pay, including incentive pays, and wondered if it would be better to pay off an existing mortgage, approximately $60,000, just refinanced last month at 3.5 percent and a 15-year term? Or would it be better to max out the Roth TSP and set up another deferred account or IRA of some sort?

My wife makes about $55,000 per year.

A. It’s impossible to say what’s best for you without the proper analysis and understanding of your particular goals, resources and constraints. In general, however, I prefer to see you retain the mortgage and invest the money prudently instead of using it to pay off the mortgage.

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TSP residential loan

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Q. Can a TSP residential loan be taken out to pay off a mortgage on a primary residence?

A. No.

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