Q: I am 56 years old and have 33 years of combined federal service (20 years in the military and 13 years as a civilian), and due to personal reasons, I chose to retire on March 26, 2010. Approximately 14 months ago, I borrowed $50,000 from my Thrift Savings Plan account. I managed to repay approximately $10,000 of the loan prior to retirement, so I still owe approximately $40,000. Can you tell me approximately how much I will have to pay in taxes and the early distribution penalty? The reason I am asking is because I am in a position where I could refinance my residence and repay the remainder of the loan in full, thereby not incurring the aformentioned charges. Would it be wiser to refinance my residence and pay back the TSP loan, or simply pay the taxes and distribution penalty?
A: You’ll have to ask whoever will prepare your tax return for 2010 how much you’ll likely pay in taxes on the distributions and use this information to figure out whether refinancing is the better alternative. I can tell you that you won’t owe any early withdrawal penalty since you’re separating from service during or after the year in which you reach age 55.
