Q. I have been working for the federal government for 10 years. I have contributed the max for most of that time to the Thrift Savings Plan/FERS. After a divorce, I have been battling debt in the form of school loans, credit cards, etc. In an attempt to pay off the debt, I pay approximately $700 per month. I have attempted and requested to decrease the annual percentage rate on some items, with little success. I have a fair amount in my TSP. I am debating whether to withdraw just the amount I need to pay off the debt (20 percent of the entire amount) and be debt free. At that point, I would increase my contribution to the max again in an attempt to make up lost ground. I understand the six-month penalty. I am 34. I started at 24. I have many more years to contribute. I am also in the Air Force Reserve. Is this a good move, given my age and years to contribute? Also, what tax percentage would I be paying off the withdrawal amount (10 percent or 20 percent)?
A. I suggest you consider taking a TSP loan, instead of a withdrawal. If you elect to take, and qualify for, a financial hardship withdrawal, the automatic withholding will be 10 percent, but you’ll be on the hook for whatever tax and penalty accrue when you file your tax return for the year.
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Take a loan. You will pay interest to yourself, and there is no penalty.