Q. I am a federal worker, 51 years of age and am considering a withdrawal from my TSP account to pay off my substantial consolidated college student loans. If I pursue this plan what will be the tax ramifications or any other penalties? Another option for me is to take a loan out from my TSP account to pay the loans off and then begin to make payments back to the account. Is interest charged on these type of loans? Are penalties involved or any type of tax implications? If I do not pay all the “loan” back before retirement, what penalties/taxes do I incur?
A. As long as you are an active employee covered by the TSP, you may not withdraw your money except in the case of demonstrable financial hardship. In this case you will be subject to income tax and the early withdrawal penalty. If you take a loan, you will be required to repay the loan in monthly installments, with interest. Keep in mind that the interest is paid into your TSP account, not to a third party. As long as you repay the loan, on time, there will be no tax costs or penalties. If you fail to repay the loan, the outstanding balance, including upaid interest, will be declared a distribution and you will owe tax and any penalty, if you do not roll over the distribution according to the applicable rules.
2 Comments
I find it very frustrating that the question “what are the tax ramifications” has been asked in many of these TSP loan questions and it’s never really answered.
When a loan of your “pre-tax” dollars is given to you, you pay it back with after-tax dollars. When you withdraw your money at retirement, those dollars are taxed again resulting in double-taxation of the loan money.
Double-taxation! That is the ramification of this…these types of loans should be illegal.
I understand that when I turn 59.5 I can begin withdrawing my TSP contributions without a tax penalty. May I continue working for the Federal Government after age 59.5 while augmenting my take home pay with a TSP life annuity? Right now its looking like I’ll never be able to retire and am looking for ways to bring more money home to live on. Thank you for your help.