Withdrawing money?

[jl840]

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Would it be a smart thing to withdraw money from my TSP account to get out of financial trouble. I have some credit card balances that I am paying using a credit counseling company. Should I withdraw money from my TSP account and pay these off? Thanks for any comments.

 

[Dave M]

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I say again, if you need the dough reduce your contribution and use that to make the payments. Leave untouched what you have in the TSP.

You will pay tax and there will be no witholding so you will have to put that amountaside or eat it later.So right off you will lose a bunch. Then over time, you will lose all the earnings that amount would have accrued. Given 20 years it addsup to probably three times the sumyou take out.

Takeout $1000, pay $250 in taxes, pocket $750, lose $3000 in earnings. You could've had $4000. You paid $3250 to get that $750. No credit card can possibly be that bad.

This is just my opinion of course. If it is an emergency, that's different. Maybe you have what they used to call "expectations" and no longer anticipate a need for the TSP.

Dave

 

[cowboy]

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Dave M wrote:

I say again, if you need the dough reduce your contribution and use that to make the payments. Leave untouched what you have in the TSP.

You will pay tax and there will be no witholding so you will have to put that amountaside or eat it later.So right off you will lose a bunch. Then over time, you will lose all the earnings that amount would have accrued. Given 20 years it addsup to probably three times the sumyou take out.

Takeout $1000, pay $250 in taxes, pocket $750, lose $3000 in earnings. You could've had $4000. You paid $3250 to get that $750. No credit card can possibly be that bad.

This is just my opinion of course. If it is an emergency, that's different. Maybe you have what they used to call "expectations" and no longer anticipate a need for the TSP.

Dave

I don't think anyone could explain it any better Dave!!

 

[Rod]

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How much interest are youpaying monthly on the credit cards???

If you are paying more $$$ in interest than your TSP is generating on average, then it only makes sense to pay off the credit cards.

To do so otherwise would be counter-productive. Especially if your interest is outrageous.

Another suggestion, you can always stop your TSP contributions and allocate that toward paying down your credit cards. Then once those are paid off, you can always begin your TSP contributions.

God Bless:^

 

[GatorinGA]

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Can't you get a loan against your TSP account and pay no taxes? When reading the loan information on the TSP site, the only references it makes to having to pay taxes is if you default on your loan:

"If correct loan payments are not received from your agency in accordance with the repayment schedule, you must send in a payment yourself to cover the missing amount. If you do not make up the missed payments within the time limits set by the IRS, the TSP will declare a taxable distribution for default in the amount of the unpaid loan principal and any unpaid interest. The distribution will be subject to income tax for the year in which it is declared. You may also be subject to the 10 percent Internal Revenue Code early withdrawal penalty tax on this distribution."

I've gotten 2 loans in the past, and I do not believe that I paid any taxes on these loans, and the money was put back into my account plus interest at the G-fund rate. This has to be a better idea than getting a loan and paying the bank 7% on a car, or paying 12% interest on a credit card. I realize that you can earn better than the G-fund rate by having the money in other funds, but if you earn 4% interest on the loan amount in G, plus the 7% or 12% interest you won't be paying the bank, can you beat a 11% or 16% ROI?? Certainly paying cash for a car, or having no credit card date while leaving all of your money in TSP is ideal, but for some of us where that isn't where we are financially, a TSP loan in the short-term seems like a good idea.

 

[Dave M]

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The key fact is that you are repaying the loan with after-tax dollars. Then when you withdraw the money down the line, you pay tax on it again. Borrowing defeats the whole purpose of the TSP. I took out a loan once, won't do it again.

Dave