Funding a house down payment

[NatInPW]

I turn 62 soon, and am considering retiring this year (or next). I just put a cash-only contract on a house. The problem is I don't have quite enough cash to close, and I want to make some changes after we close, so I'm looking to raise 80K.

What's the best way for me to get that money? A few options I've considered:
1) Cashing in my wife's 403-B which after tax should be enough - she's retired currently and is willing to use her funds for this.
2) Borrowing against my TSP balance and trying to save enough to pay some of the loan off by the time I retire.
3) Credit Union loans. The rate would be high because I evidently have no credit (paid mortgage, car loans and credit cards off a long time ago - didn't realize that actually lowered my credit rating).


Am I correct in thinking that I can take the TSP loan now, and retire at the end of the year and it would be declared a distribution for next tax year? Or would it be a distribution in the year the loan was made?



I've seen a lot of counsel against making a TSP loan, but it seems in my case it might be a good idea?


Any thoughts or advice would be most welcome.

 

[Skorcher]

I'd apply for a home loan instead of withdrawing from TSP or 403-B plans.
If you were to retire at 12/31/22 it would take at least 120 days before the TSP would declare your unpaid loan as a distribution. See the article here: https://www.myfederalretirement.com/unpaid-tsp-loans/

 

[TommyIV]

Why would you consider taking the TSP loan over the 403b withdrawal?

I'm no expert so I'm not considering taxes and other important factors.. but the first thing that comes to my mind is the TSP loan will carry interest payments and a loan fee, where the 403b will just cost you your tax rate.

Again, I know I may missing something so why do you think the TSP loan could be a good idea?

 

[NatInPW]

Again, I know I may missing something so why do you think the TSP loan could be a good idea?

Taxes - if I take the 403b funds now it will push me into a higher bracket for 2022. But I'm certainly no expert myself.

I don't think a bank loan is possible now. I already have a cash contract on the house so I don't think I'll be able to introduce a new contingency (the cash offer was what made my offer win - the market is suprisingly hot here still).

 

[Bullitt]

80k is a pretty big shortfall.

I don't like any of those options, but if this is a need and not a want, I'd use the 403b to pay it down if your TSP alone can carry you in retirement.

 

[tsptalk]

the first thing that comes to my mind is the TSP loan will carry interest payments and a loan fee, where the 403b will just cost you your tax rate.

I'm not sure if you know that the interest you pay on TSP loans gets paid to your own account. That may or may not make it a better choice, but I wasn't sure if you knew that.

 

[DreamboatAnnie]

There is also a $50,000 limit on the TSP loan, and it must be taken from the employee's contributions. Not sure how many years they give you to pay back loan (... is it 5 years?). In any case, that would affect the monthly payments you must make in 2022 and then full balance must be paid when you retire (in 2023). The TSP loan of $50K would not fully cover the $80,000 that you require.

If bank loan is not possible, you should consider taking the $50k TSP loan now and $30K from wife's retirement fund (403b) now. This pushes as much as possible to be taxed next year.

But, depending on where you are at on tax table, you might be able to pay a lower rate on some or all of the $30K on 2022 tax return and should consider taking more than $30K from the 403b in 2022 depending on where you are going to fall in 2022 tax brackets.

To figure this out, Download an IRS 1040ES form to figure what tax bracket you will fall into for 2022. That should help you determine how much to request for TSP loan (to push taxable income into next year) versus amount to pull from 403b (to hit taxable income this year to extent it will get taxed at lower rate). At minimum, I would do this computation to find out how close you are to the next higher tax bracket.

Here is link to form and it includes tax brackets https://www.irs.gov/pub/irs-prior/f1040es--2022.pdf

Best wishes to you! :smile:

 

[DreamboatAnnie]

Rough quick estimate is to take taxable income you expect to have by end of year (annualize your pay stubs) plus any other taxable income, subtract "standard deduction" of $25,900 (IRS 1040-ES 2022, see link in prior post, Married filing joint-see page 1), and then check to see where that number falls in the tax estimation tables on page 7 (MFJ is table Y-1, see columns 1-2). If your 65 or older or blind, see page 1 to increase that std deduction.

Notice how the Married Filing Joint Table Y-1 columns1,2,4 shows that up to $83,550 the tax rate is 12% and then jumps to 22% on portions above $83,550 up to $178,150. Then next bracket goes to 24% on the portion of taxable income above $178,150, etc. As you can see, $83,550 is an important number as rate Jumps 10% from 12% to 22%...that is a HUGE jump!

If you expect to need a lot less to live on in 2023, you can maximize the TSP loan to push taxes to next year. But, looking at these tables is important to know what tax rate you will be paying.

The full TSP loan might run around $850-950 per month (really not sure at 2% Its about $875). They should charge you the G fund rate, whatever that is), but loan fee is very low and interest you pay just goes back into your TSP account.

 

[DreamboatAnnie]

No idea if Congress will increase tax rates for 2023, but with elections in November I tend to think they might wait another year.

 

[evilanne]

How much do you actually need to close? I would hold off on the changes to reduce amount you need to borrow or withdraw from any retirement account
You have a paid off mortgage, what about a mortgage on existing home-refinance to get a cash out and probably at a lower rate than a regular loan and faster to close than a mortgage on a new home.
How much are your cars worth? I hear the used car market is hot these days.
TSP loan is a good way to push it into next year and you have a 60-90 days to pay it back from your date of separation before it will be a counted as a distribution. Only thing I am not sure is how they would code your distribution, even though you are & will be over 55 or 59.5, I seem to recall something about them coding these types distributions as an early distribution that may subject you to the 10% penalty in addition to he taxes owed. It does give you some flexibility if you can pay it back within the timeframe but be careful that there aren't any major surprises.

Happy Trails!

I turn 62 soon, and am considering retiring this year (or next). I just put a cash-only contract on a house. The problem is I don't have quite enough cash to close, and I want to make some changes after we close, so I'm looking to raise 80K.

What's the best way for me to get that money? A few options I've considered:
1) Cashing in my wife's 403-B which after tax should be enough - she's retired currently and is willing to use her funds for this.
2) Borrowing against my TSP balance and trying to save enough to pay some of the loan off by the time I retire.
3) Credit Union loans. The rate would be high because I evidently have no credit (paid mortgage, car loans and credit cards off a long time ago - didn't realize that actually lowered my credit rating).


Am I correct in thinking that I can take the TSP loan now, and retire at the end of the year and it would be declared a distribution for next tax year? Or would it be a distribution in the year the loan was made?



I've seen a lot of counsel against making a TSP loan, but it seems in my case it might be a good idea?


Any thoughts or advice would be most welcome.

 

[DreamboatAnnie]

See Fedsmith article on IRS penalty. If your age 59.5, penalty is not applicable (as NatInPW is almost 62) but I don't know about his wife. Also don't know rules on 403B.

https://www.fedsmith.com/2021/05/13/early-tsp-withdrawals-without-penalty/

Also check TSP 536
https://www.tsp.gov/publications/tsp-536.pdf

You could also take an in-service withdrawal now, without IRS penalty, but full amount would be taxable in 2022 and you'd have 20% withheld for taxes.

 

[flalaw97]

I have been looking into what happens to a TSP loan balance after you retire and it appears that you will have 90 days after you retire to pay it off or the balance will be declared a distribution. At your age there won't be any penalties, but it will be taxed. One thing you might be able to do is pay some of it off with your annual leave payout when you retire. But be aware that you will not be able to get any money out of your TSP after you retire if you have an outstanding loan balance until one of the following things happens: 1. you pay off the balance or 2. you submit the form to have it declared as a distribution or 3. 90 days pass and TSP will automatically declare the balance as a distribution. I don't know whether that distribution would be declared for the year you received the loan or the year you retire. Also note that some of the loan rules are changing with this new reorg. For example, you will no longer be able to reamortize the loan (change monthly payments) which is a bummer because that is how I used to shorten the payment period (by reamortizing over a shorter time frame) with the knowledge that I could dial it back if payments were causing a problem. Good luck!