If you're in danger of losing your home, you can turn to the money in your Thrift Savings Plan. Taking money out of the retirement plan will result in some extra costs, but at least it's there to use as a last resort. The best option depends on the amount of money you need and your current work status.
If you still work for the federal government, you can make a hardship withdrawal from a TSP if you have negative cash flow. It's an expensive option since you must pay income tax on the entire withdrawal. In addition, if you're younger than 59 1/2, there's an additional 10 percent early withdrawal penalty. On top of these costs, you won't be able to contribute to the TSP for a six-month period, which will delay your retirement savings even more.
Hardship Withdrawal Exceptions
There are some situations where early withdrawals won't get charged the 10 percent penalty. One is if you have become totally and permanently disabled and can no longer work. The IRS also waives the penalty if you use TSP funds to settle a court ordered divorce agreement. If your housing problem is caused by a disability or a divorce, you'll only owe income tax on your withdrawal.
You can take up to $50,000 from the TSP as a plan loan. This is the best option if your cash flow problems are temporary. The catch is it must be paid back within five years with interest. If it's not, it counts as a taxable withdrawal and the IRS will slap on the early withdrawal penalty.
You could covert the TSP into a life annuity, but only if you're leaving the federal service. You'll end up with a stream of monthly payments for life, some of which you can apply to house payments. You'll have to pay income tax on the annuity, but you won't pay the withdrawal penalty regardless of your age.
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