Q. I am planning to retire within months of hitting 20 years in the government, which will be in September 2016. I will be 57 years old at that time. I will wait until I’m 60 to take my annuity, so I need to fund my existence out of savings for two years or so. My husband currently collects a military retirement and is a federal employee, too. He will quit when I do and will have about eight or nine years in the government. He will also wait so that his payments aren’t reduced.
Our only income for the “gap” will be his military retirement, and we’ve been thinking about how to create a cushion to back up what we have already saved. I could take a loan from TSP before retiring and, when I quit, just not pay it back, leaving any loan balance to be counted as taxable income.
Is it true that I won’t have a penalty because I’ll be over 56? If our only income is my husband’s military retirement of about $38,000 taxable income, is it correct that we might pay 25% or so on the TSP loan proceeds when they are converted to income, or are we looking at a much higher loss rate?
A. Under the circumstances you describe, the TSP distributions will be exempt from the early withdrawal penalty. The tax you ultimately owe on the withdrawn TSP money will depend entirely on your tax returns for the years affected.