Q. My wife and I are both federal employees and recently took out TSP real estate loans to use toward the down payment of a home. She is seriously thinking about a career change and leaving federal service. I understand that the unpaid balance, and accrued interest, of the TSP loan will be due upon her separation from federal service. However, we do not have enough personal funds to repay the loan within the 90 days. I understand that TSP will issue a taxable distribution on the unpaid balance plus interest, and we will be liable for the tax and a 10% early withdrawal penalty (we are both in our mid-30s).
Is there any way we can avoid or reduce the tax liability and/or early withdrawal penalty on the taxable distribution? Since we do not have the personal funds to repay the loan or contribute to an IRA, will we just have to take the hit? How can we calculate the total tax liability plus early withdrawal fee we will owe on the taxable distribution (approximately $27,700)?
A. The only way I know of to avoid the penalty (and continue to defer the tax) would be to contribute the distribution amount to an IRA within the allowed rollover period. I am not a tax accountant, however, and you should consult one for further guidance. The declared distribution should be equal to the sum of the unpaid payments remaining for the loan.
