Thrift Savings Plan Loan Help/Withdrawl/Tax

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mattod122
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Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by mattod122 »

I am contemplating leaving federal service and in doing so will need to repay a home loan that was taken from my TSP within 90 days. My loan balance is $34,000 and I have approx. $55,000 remaining in my TSP. The good thing about the TSP is that I am paying my loan back to myself with interest, not some bank. I don't have $34,000 laying around, so my options would be to either take out another loan and then transfer my $55k to my next jobs 401k plan or withdraw my TSP funds, get charged the penalty, tax, and pay off my loan.

What would you do in this situation? Are there some tax implications or things I am not thinking about?

The TSP website has the following, I am having some trouble understanding this:


"If you do not repay your loan in full, a taxable distribution of the outstanding balance of your loan will be declared. You may be able to roll the amount of the distribution into an IRA or eligible employer plan within 60 days of it being declared to avoid taxes and penalties.


If any part of your loan is associated with tax-exempt contributions or Roth contributions, those contributions will not be subject to tax; however, Roth earnings that are not qualified will be subject to tax.

You will not be able to withdraw your TSP account until your loan is closed by either payment in full or taxable distribution."
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Earl Lemongrab
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by Earl Lemongrab »

Which part is confusing? If you don't pay the loan back in the 90 days, the plan will take it out of your account. It's then just like you had withdrawn it after leaving service, so any taxable amounts will have ordinary income tax (fed and state) due, as well as tax on the Roth earnings (but not contributions). There is also 10% penalty on the taxable amount.

Try not to do that.
Tdubs
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by Tdubs »

But it sounds like you could avoid it being a distribution if, within 60 days, you found the money someway and transferred it to an IRA or your new retirement plan?

Would you be able to scrap that amount together in two months?
gclancer
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by gclancer »

Trying to help you think creatively about this. Under the new tax law, you have until your next tax return is due (including any extensions, so October 15 of next year) to roll the loan amount into an IRA to avoid penalty. This is NOT the case for your current TSP Loan (assuming you took it out prior to 2018) but WOULD be true for a new general purpose TSP Loan if you were to take one out.

Do you have any IRA money outside of TSP? If so, what if you did a 60 day rollover, paid off the residential TSP Loan and took a general purpose TSP Loan to put the $34k back into your IRA. That would at least buy you an additional year to come up with the $34k to avoid tax and penalties (you’d be out the $50 processing fee). Obviously if you can’t come up with the money a year from now either this maneuver won’t do you a lot of good.

You should have about $10k available for a general purpose TSP Loan right now so you could also buy yourself until 10/15/19 on $10k and leave yourself with 60 days to drum up $24k.
delamer
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by delamer »

If you don’t repay the $34,000 into your TSP or into a rollover IRA for your TSP, then you will owe federal and state (if applicable) ordinary income taxes on the $34,000, plus a 10% federal penalty. This is assuming there are no Roth TSP funds involved and that you are under age 59.5.

You won’t need to repay the loan. You just have to pay the taxes. So the remaining $55,000 in your TSP could either stay there or be rolled over. Don’t cash that out — all you’d do is create an even larger tax bill.

So if you are in the 22% marginal federal bracket and a 5% state bracket (for example), you would owe $12,580 in taxes and penalties on the outstanding $34,000 loan (which is treated as an early distribution).

Using my example, your choices are coming up with $12,580 or $34,000 — or something in between if you repay part of the loan. (Obviously, I don’t know if I have your brackets right, so your actual tax/penalty may differ).
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Duckie
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by Duckie »

mattod122 wrote:I am contemplating leaving federal service and in doing so will need to repay a home loan that was taken from my TSP within 90 days.
<snip>
What would you do in this situation?
Not leave.
neoptolemus412
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by neoptolemus412 »

First, I'd try to pay back the loan in that 90 day period to avoid any taxes or penalties as it would be at your marginal tax rate + 10% and state tax implications as well. All other options may trigger a withdrawal and could be upwards of 40% or more on the $. I'd look for low interest rate debt to pay off the TSP loan within the 90 days. A few options. Roth IRA contributions can be taken out tax-free (there are a few timing issues, but it's doable). If you have enough equity in your home, a HELOC would work. Credit card churning could work. I know some cards will give you a balance transfer of up to 18 months at 0% with 0%-3% fees. None are great options, but you could borrow below 5% interest and pay off the TSP loan amount through such borrowings in 12-18 months.
Skierajs
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by Skierajs »

If you feel sure about your new job, find out if their 401k offers loans. If so, you just need a bridge loan - you could take out a personal loan or home equity loan to pay back the TSP, then roll the money into the new 401k, then take out a new 401k loan under the new plan to pay back the bridge loan.

There’s definitely some risk in the above, such as if the new job doesn’t work out. You’d also need to be really sure that the new employer’s plan allows loans based on funds you’ve rolled in (usually they do). The worst case scenario would still just be having to take a withdrawal I suppose.
basspond
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by basspond »

mattod122 wrote: Sat Jul 14, 2018 12:13 pm ...The good thing about the TSP is that I am paying my loan back to myself with interest, not some bank.
It is not just you but a lot of others that this logic doesn't make sense. You still have to pay interest if you borrowed from another bank and your TSP account would still be making interest. In this case you used your retirement as your collateral. Buckle down and pay off before you switch jobs.
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Earl Lemongrab
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by Earl Lemongrab »

basspond wrote: Sun Jul 15, 2018 3:30 pm
mattod122 wrote: Sat Jul 14, 2018 12:13 pm ...The good thing about the TSP is that I am paying my loan back to myself with interest, not some bank.
It is not just you but a lot of others that this logic doesn't make sense.
Why is that?
basspond
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by basspond »

Earl Lemongrab wrote: Sun Jul 15, 2018 4:26 pm
basspond wrote: Sun Jul 15, 2018 3:30 pm
mattod122 wrote: Sat Jul 14, 2018 12:13 pm ...The good thing about the TSP is that I am paying my loan back to myself with interest, not some bank.
It is not just you but a lot of others that this logic doesn't make sense.
Why is that?
Why does it matter who pays your interest on your retirement account? Does the loan interest you pay worth more then the loan interest some one else pays to buy the interest on your account? What would you say if all loan terms stated if you change or quit your job the loan is called immediately and if you used any funds from your account you will be charged a 10% premium?
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Earl Lemongrab
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Re: Thrift Savings Plan Loan Help/Withdrawl/Tax

Post by Earl Lemongrab »

basspond wrote: Wed Jul 18, 2018 7:47 am
Earl Lemongrab wrote: Sun Jul 15, 2018 4:26 pm
basspond wrote: Sun Jul 15, 2018 3:30 pm
mattod122 wrote: Sat Jul 14, 2018 12:13 pm ...The good thing about the TSP is that I am paying my loan back to myself with interest, not some bank.
It is not just you but a lot of others that this logic doesn't make sense.
Why is that?
Why does it matter who pays your interest on your retirement account? Does the loan interest you pay worth more then the loan interest some one else pays to buy the interest on your account? What would you say if all loan terms stated if you change or quit your job the loan is called immediately and if you used any funds from your account you will be charged a 10% premium?
In the end it doesn't matter much. As you note, there are some risk peculiar to these type of loans, although that is somewhat relieved for new ones under the changes to the tax laws.

The loans from TSP will generally have a better rate than you can get commercially. For example, the current rate is 2.875%.
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