Small Withdrawal Tax Amount?

[Daddy-O]

I am about to purchase a new motor for my boat, which will cost approx. $17,000. I have $219k in my TSP. I am 63 years old and fully retired, and I am not taking any distributions from my TSP, as I am able to live comfortably off of my retirement annuities at this time. My plan is to take $20K out of my TSP, paying 20% Federal withholding for a net payment to me of $16k, then pay cash for the rest of the purchase price of the motor. Does this make sense, or is this unwise? I have not looked into financing the purchase through the boat dealership, but I assume the high interest loan through them, or my bank, would be worse than taking the $4K hit on taxes, and I really don't want more monthly payments. Assuming a 5% return annually on my TSP, if I withdraw $20K, I will be giving up approx. $24K in earnings over the next 5 years. If I finance the $17k purchase for 5 yrs at 8% interest, it will cost me approx. $21K total, and I will have a $350/mo payment for 5 yrs. I'm not liking the idea of more debt at this point in my life, so I think the TSP withdrawal is the better option. Is this wrong thinking on my part? Thank you for any input!

 

[tsptalk]

Hi Daddy-O!

I know what a financial expert might tell you to do, but peace of mind, to me, is as important as any "correct" decision.

Depending on your allocation, you could lose $20K in your TSP in a few weeks if we get a correction - let alone a bear market.

Since you don't even need the money to live, I would personally choose to take the money out, try to sidestep the next downturn in the market (easier said than done.) Your life won't change.

A TSP loan would be an option since you pay the interest back to your own account, but it sounds like you are already retired and I don't believe that is an option.

Anyway, live life. You never know what's going to happen. If you need to live on cat food in your 90's, so be it. It may be better than the cricket food that have planned for us.

 

[JTH]

My Dad is 70 and I keep trying to encourage him to spend more on himself and not feel guilty for having nice things.

We've had 14 -20% (or greater) bear market declines in the past 69 years, and 3 of those were in the last 7. Point being, with the markets at all time highs, if ever there was a time to take the TSP money out, it might be now.

 

[nasa1974]

I'll be corrected if I'm wrong, but I think the "G" fund is earning about 4%/year. Make the withdrawal and make sure the rest of your TSP is in the "G" fund you will recover it in less than 3 years.

 

[Daddy-O]

Hahaha!! As long as it is the moist catfood, not the dry. Thank you for your reply.

 

[Daddy-O]

Good point, JTH. I kinda look at this money as money that I will never see, but which will be there for my wife when I am gone. But wait... there is a mandatory withdrawal at some point, right? I have to research when that is.

Daddy-O

 

[Daddy-O]

Thank you for your response, NASA1974! I am in the L Income fund distribution, which is probably very close to all in on the 'ol G Fund. The current rate for it is hovering at or just below 5%.

Daddy-O

 

[tsptalk]

But wait... there is a mandatory withdrawal at some point, right?

An AI response to the madatory withdrawal age:

Prior to 2019, the Thrift Savings Plan (TSP) required a full withdrawal election after turning 70 1/2 if an individual hadn’t initiated any withdrawal options and had separated from federal service. However, the Bipartisan Budget Act of 2017 eliminated this requirement, and the TSP now helps calculate Required Minimum Distributions (RMDs) starting at age 70 1/2.
Key Takeaways:

• The TSP will calculate and ensure compliance with IRS rules for RMDs at age 70 1/2 and beyond.
• No longer required to make a full withdrawal election at age 70 1/2.
• RMDs will be based on the account balance and life expectancy as defined by the IRS.

Note that the age for RMDs was increased to 73 for those who turn 72 in 2023 or later, as per the SECURE 2.0 Act. The first RMD must be taken by April 1 of the year after turning 73.

 

[evilanne]

Here is a good RMD Calculator you can use: RMD Calculator Just enter the year of birth for you & you wife, your TSP balance and the expected ROR

Depending on what your marginal tax rate is MFJ, you may want to consider withdrawing more now/annually and using or investing it because you lose control of the amount when you hit RMDs. Conversion to a Roth is also an option with tax rates being lowest until next year (don't know what may happen in 2026). Also when you die, you wife will be filing Single with lower tax brakets. Capital Gains on investments are usually lower than withdrawals from retirement accounts + up to 85% of SS is taxable. Another factor is Medicare, taking too large of a withdrawal can subject you to IRMAA and they evaluate that 2 years prior.

Good point, JTH. I kinda look at this money as money that I will never see, but which will be there for my wife when I am gone. But wait... there is a mandatory withdrawal at some point, right? I have to research when that is.

Daddy-O