Ask Bob: Should I Take a Financial Hardship Withdrawal from My Thrift Savings Plan?

The amount you withdraw from your Thrift Savings account for a financial hardship must be limited to your financial need.
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Question

I have tried several times to refinance a $70,000 loan but once they find out that I have another loan for $35,000 there is nothing they can do for me. I was thinking about using my Thrift Savings Plan (TSP) as a hardship to pay off the $35,000 loan and other bills, then try to refinance the $70,000 loan again.

Answer

It is tempting to tap TSP funds for a hardship, and it could be the right thing to do, says Stephen Zelcer, a fiduciary advisor specializing in retirement planning and federal benefits. But, there are several things to consider.

“If you are under age 59½, then your TSP hardship withdrawal will be subject to an early access penalty of 10%,” he notes. “You will also need to pay taxes on the distribution that comes from the traditional portion of your TSP.”

Because of the above considerations, you may want to explore a TSP loan, Zelcer says. “With a loan, you can avoid the upfront taxation and, should you retire after 59½ you could avoid the 10% early access penalty, too,” he explains.

Of note, the TSP has a section on its website devoted to withdrawals and loans.

One thing to consider is the possibility that you may not be eligible for a financial hardship in-service withdrawal. According to the TSP website:

The amount you withdraw from your account for a financial hardship must be limited to your financial need. To be eligible, your financial need must result from at least one of the following four conditions:

  • Recurring negative monthly cash flow
  • Medical expenses (including household improvements needed for medical care) that you have not yet paid and that are not covered by insurance
  • Personal casualty loss(es) that you have not yet paid and that are not covered by insurance
  • Legal expenses (such as attorneys' fees and court costs) that you have not yet paid for separation or divorce from your spouse

Also, of note: When you take an in-service withdrawal, you cannot return or repay the money you remove from your TSP account. You permanently reduce your retirement savings by the amount of the withdrawal as well as any future earnings you would have accrued on that money.

But, before you do a hardship withdrawal or a loan, Zelcer recommends answering the following questions then talking with a qualified adviser, especially one familiar with federal benefits.

  • What is your current age?
  • When do you plan to retire?
  • When did you take out the second mortgage?
  • What prompted you to get the second mortgage?
  • How much equity do you have in your home?
  • Do you have any other debts?
  • How's your current cash flow? Positive or negative?
  • Do you have any dependents or a spouse?
  • What will your retirement expenses be (especially in light of your declining health)?
  • How much income will you get from your fixed income sources (Federal pension, Social Security, any other pensions or annuities)?
  • Are your fixed incomes enough to cover your expenses?
  • If the fixed income is insufficient, how much income needs to be generated from your TSP (and other investments)?

Got Questions? Get Answers!

Got questions about money, Social Security, Medicare, retirement accounts? Get answers. Email Robert.Powell@TheStreet.com. Kim McSheridan assisted with this report.

Question

I have tried several times to refinance a $70,000 loan but once they find out that I have another loan for $35,000 there is nothing they can do for me. I was thinking about using my Thrift Savings Plan (TSP) as a hardship to pay off the $35,000 loan and other bills, then try to refinance the $70,000 loan again.

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