Should You Pay Off Your House With Your TSP?

Should You Pay Off Your House With Your TSP?

If you’re close to retirement, the idea of not having a house payment can be very appealing.

You might even have enough money in your TSP to simply cut a check and pay off your current mortgage.

But is this a good idea?

Should you use your retirement savings to “retire” your house payment?

The short answer: it depends.

To better understand the numbers, let’s take a look at an example…

You’re in your last year of your working career. And let’s assume you have a $300,000 Traditional TSP balance, and you owe $150,000 on your house.

On the surface, it looks pretty simple.

You can easily take $150,000 out of your TSP and pay off the house.

But there’s something you need to consider….

The IRS & the tax consequences!

*We always recommend speaking with a tax advisor about your specific situation, and the information below is for educational purposes only.*

If you “cash out” $150,000 of your TSP, you’ll be paying taxes on $150,000 + any other earned income for that particular year.

As you can imagine, this will most likely bump you up into a higher tax bracket.

In a normal year: If we assume you earned $75,000 in wages, you would be in the 22% marginal tax bracket and owe approximately $15,413 in federal + FICA taxes without any additional TSP withdrawals.

If we combined the $150,000 TSP withdrawal and $75,000 in wages, you would owe taxes on $225,000 of income, bumping you up into the 35% marginal tax bracket.

This would equate to $61,401 in federal + FICA taxes owed!

All else equal, your tax bill would increase by $45,988 or 398%!

Not to mention, TSP is required to withhold 20% as a tax estimate.

This means if you wanted to pay off $150,000 of mortgage debt, you’d need to withdraw even more of your TSP to cover it.

Here are some other financial moves you may want to consider.

Right now, we’re seeing historically low interest rates for mortgages.

Have you looked into refinancing?

It’s possible to lock in a 15-year mortgage rate below 3% right now (depending on different factors).

A few things to know:

–What’s your current mortgage interest rate?

               -How much equity is in your home?

               -What’s your credit score?

               -What would your new refinance rate be?

               -What would the cost of refinancing be?

               -How long do you plan on staying in your home?

All these will help determine whether it makes sense to refinance.

You can also consider paying the debt off over time rather than in one single lump sum.

By planning your payments and withdrawals accordingly, you can avoid bumping up into a higher tax bracket than necessary.

This will help ensure your money lasts you longer in retirement.

DISCLAIMER: GPIS does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.