Ask The Experts: Money Matters

By Mike Miles

Taxable distribution vs. paying off TSP loan

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Q. I have separated from federal service with an existing Thrift Savings Plan loan. My intent is to take a lump-sum withdrawal and take a taxable distribution versus paying off the loan. In the end, will I end up paying more or less tax if I were to pay off the loan versus taxable distribution?

A. It’s impossible to say what you’ll pay “in the end,” but if you repay the loan on time, your tax on the money owed will be zero until it is ultimately withdrawn.

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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now, I use up the one-time allowance to take part of the balance and incur immediate tax bills for the amount withdrawn.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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Borrowing from TSP

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Q. I have two Thrift Savings Plan accounts — one with the military and one civilian. Because of my financial situation, I would like to take some money out for debt consolidation. I was weighing the option of borrowing from my civilian vs. closing my military account (which I am no longer contributing to) and using those funds.

If I close my military account, can I roll a portion of it over to my civilian account, and use the rest?

What/how much of a tax penalty am I looking at if I do either?

Would it make sense to close my military account and just borrow from my civilian account? I may possibly get called back on active duty.

I need to make a decision within the next two weeks as I have a number of financial obligations hitting the first of November.

A. You may use form TSP-77 to request a one-time partial withdrawal from your civilian and/or your uniformed services account(s) if you are at least age 59½ or separated from service. You may combine the accounts if you are separated from service using form TSP-65.  If you are subject to the early withdrawal penalty, the penalty is 10 percent of the withdrawn amount. There is no penalty for taking a loan at any age. Unfortunately, there is insufficient information here for any specific advice.

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TSP loan and furlough length

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Q. I want to take a loan from my Thrift Savings Plan account to cover my bills during the shutdown.  According to the TSP loan booklet, as long as the furlough last less than 30 days, this is not a problem. If the furlough lasts more than 30 days, the loan becomes a disbursement and is taxed, plus additional penalties assessed (10 percent) by the Internal Revenue Service. Is this true? How can one prepare for a furlough that lasts longer than 30 days?

A. I don’t know where you read this, but it’s not true. If you’re in nonpay status, you are ineligible to initiate a TSP loan, so the question is not applicable. If you have a loan and go into approved nonpay status, you may suspend loan payments for up to one year. After that, your loan will be reamortized and you will have to make loan payments by check to avoid default. See pages 13-15 of the TSP loan booklet at https://www.tsp.gov/PDF/formspubs/tspbk04.pdf for the facts.

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TSP loan

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Q. I’m eligible to retire CSRS Offset in a few months. I was considering a Thrift Savings Plan loan prior to retiring to pay off other bills. I understand that upon retirement/separation, I would receive a Form 1099 for taxable income. Is this something I should consider?

A. If you don’t repay your outstanding loan balance within 90 days of separation from service, the amount due will be declared a taxable distribution and will be treated as though you took the money from your account on the date of the declaration. I believe that you should always consider all reasonable options when it comes to making important financial decisions.

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TSP loan

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Q. In February 2012, I took a loan of $50,000 from my Thrift Savings Plan account to make a down payment for the joint mortgage with my spouse for our first home.

In July 2013, my spouse refinanced our home in her name. I am off the title of this home and do not make any more mortgage payment. In return, among other items, I will receive back $50,000 of my contribution using my TSP account. TSP loan is only for primary residence purpose. Do I have to immediately make the payment to the balance of my TSP loan when I am now neither on the title of the home nor on the new mortgage loan? Could I use this money to buy another home for myself while still making monthly payment to my TSP loan?

A. To the best of my knowledge, there is no requirement to accelerate repayment of your loan under the circumstances your describe.

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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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TSP loan

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Q. If you have a Thrift Savings Plan loan and have paid three of the four years but want to remodel a house, can you change the existing loan to get the money?

A. Only one general purpose loan at a time is allowed.

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TSP loan payments

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Q. When money is deducted from my salary to repay a Thrift Savings Plan loan, is it deducted after it is taxed or before it is taxed? Also, is money received from a TSP loan taxed as income (assuming no payments are missed)?

A. Your loan payments are made with after-tax dollars. You loan proceeds are not taxable income if you repay the loan as due.

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TSP loan

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Q. I will be retiring with 20 years active-duty military in two years and am thinking about tapping into my Thrift Savings Plan for a 20 percent down payment on a home. I realize withdrawing early includes penalties I don’t want to pay. Would taking out a TSP loan be my best option? I’d like to use about $30,000 toward my retirement home, and the interest rates seem low enough I wouldn’t take that much of a hit.

A. If you can repay it, a loan would be a reasonable way to avoid the early withdrawal penalty.

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