Should I borrow from my thrift savings plan (TSP) to pay off $45,000 of credit card debt?
I am 58 years old and would like to think about retiring in the near future. I have $45,000 worth of credit card debt that I am only able to make minimum payments on at this point. Should I borrow from my thrift savings plan (TSP) to pay off this debt? I also understand that at age 59.5 I can make a one time withdrawal of 50,000 which would pay it off. I have no money put away for emergencies.
Yes, I would tell you to take a TSP loan and pay off the debt.
You can process it through tsp.gov, but if you're married you'll need to print and have your spouse sign in front of a notary. When you fill out the application, I would advise you to take the 5 year option to pay it off. This means you'll have the smallest payment but you can still pay off early if you would like. If you decide to retire before your TSP loan is paid in full, don't worry! Because it is a loan from yourself, it is totally forgiveable! All you will need to do is file the form that TSP will send you 30 days after retiring in order to claim the unpaid portion on that years taxes.
The reason it makes sense to take the loan is that you are most likely currently paying very high interest rates. For example: Assuming 16% rates, you're paying $7,200 a year in interest alone. Which means if you're paying the minimum monthly payment of $650, only $50 is going toward principle. Further, TSP loans are currently around 3% and all the interest you pay is going into your account. So you're paying yourself the interest- that's a lot better than the bank.
The last step would be to take the money you were paying the bank and set up an allotment to send half the money to a savings account for emergencies and send the other half to TSP.
I hope this helps. If you have any questions, don't hesitate to ask me to clarify.
You have to look at the cost of credit vs the return on the fund, and unless you are in a teaser rate, I would think that the rate of return in the TSP is less than the interest that you are paying. I would borrow against the TSP and burn the credit cards! The question is how you accumulated so much debt and what will prevent that from happening in the future.
Your loan must be repaid back on schedule or it is a deemed distribution. The portion that you default on will be added to your income. If you are under 59.5, unless retired, you will pay a 10% penalty.
I have one client that has allowed credit card debt to derail her retirement. She will have a lower standard of living than planned.
Yes! Yes you should. If you can knock out all your credit card debt in one move you should do it. It is so incredibly important that once the debt is gone you reform your habits and budget, budget, budget, and start saving and living within your means or you will simply rack up credit card debt again and be back in the same position down the road. Based on the little bit of detail you provided you should probably cut up all your credit cards after you pay them off, and certainly you should stop using them completely. You should budget out how much you will save and spend monthly and make the savings automatic. Example: say you bring home $5,000 per month and you have determined that you have $1,200 in fixed living expenses and have budgetted out that you will spend another $1,000 a month in additional expenditures, and $3,000 in savings/investment. Have the $3,000 in savings/investment immediately/automatically electronically go to the appropriate accounts so that you are forced to stay within your planned budget.
How about splitting the difference? Take $20,000 from your TSP and pay toward your credit card. I'm assuming with the lower balance your current minimum payment would be enough to actually pay off the card over time. You can use a loan amortization calculator to determine the exact length of time. You might qualify for a lower rate and raise your credit score by paying more than the minimum and having a lower balance. Plus you'll still have $25,000 in your TSP growing for retirement.
I would not recommend taking a loan - or a withdrawal - from your TSP to pay off your credit card debt. Either options "unplugs" your investments from the returns they could be earning while you repay the loan. Further, if you leave your current employment (which sounds likely based on your desire to retire soon), you would have to repay the loan or have it treated as a distribution. Should this happen after you turn 59.5 years old, you would be penalized. However, you would have to claim the distribution as income and pay the related Federal (and possibly state) income tax.
Instead, I would recommend creating a monthly spending plan each month, eliminating or reducing expenses where possible, to create disposable income to pay off the credit card debt. Entering retirement with these debts paid will reduce the withdrawals you'll need to take each year and will improve the odds of you running out of money in retirement. Click here for more info on creating a spending plan, reasons people don't budget, tips for budgeting and how to get out of debt.
Thanks for your questions and be sure to contact me if you have other questions.