Using TSP funds to cover debt

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Q: I am a Civil Service Retirement System 50-year-old employee. I’d like to withdraw $80,000 from my Thrift Savings Plan to cover unsecured debt. Is this smart? My debt is strangling me. What is the tax hit and how can I avoid it?

A: You don’t have the option to make a withdrawal unless you can demonstrate financial hardship under the TSP’s definition. If you take a financial hardship withdrawal, you will owe tax on the amount you take and you will be subject to the 10 percent early-withdrawal penalty. You can, and should, consider taking a loan instead. Taking a loan will avoid the tax and penalty. Loans are limited to $50,000 or 50% of your account balance, whichever is lower. You can learn more at http://www.tsp.gov under the topics “In Service Withdrawals” and “TSP Loans.”

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  1. Why would a loan be suggested without explaining that the funds loaned will result in being taxed twice? Taking from a retirement account is close to a last resort, but how is being taxed twice better than a 10% penalty?

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