One pot of money some may be considering tapping is the Thrift Savings Plan (TSP). It’s the federal version of a 401(k). There are two ways for workers affected by the shutdown to get to that money. They can ask for a hardship withdrawal or take out a general-purpose loan.
If you choose to take a hardship withdrawal, keep in mind that if you’re younger than 59½, there’s a 10 percent penalty for early withdrawal. Additionally, non-Roth withdrawals are subject to federal income tax and, in some cases, state income tax. So any withdrawal is reduced by the taxes you’ll have to pay.
It gets complicated if you want to take out a loan. Generally, an employee in nonpay status can’t take out a loan, according to the Federal Retirement Thrift Investment Board, which is not affected by the shutdown.
“When the TSP issues you a loan, loan payments are deducted from your pay,” the board said in guidance to employees. “Therefore, if you are not receiving pay, you will not be eligible for a TSP loan.”
But there is a provision that if an employee expects a furlough to last 30 days or less, he or she can take out a loan. Of course, it’s not clear how long the government shutdown will last. It started Dec. 22.
Beyond 30 days is where things get dicey. “Should the furlough exceed 30 days, you run the risk of defaulting on your loan and having a taxable distribution declared,” TSP says.
So right now, although employees are in a nonpay status because of a furlough, they can still technically take out TSP loans. TSP has to report to the IRS when employees have missed 2½ payments, according to Kim Weaver, director of external affairs at the Federal Retirement Thrift Investment Board.
It takes a few months for this information to be transmitted to the IRS, so employees have some time to catch up before it becomes an issue, Weaver said.
“You must be very sure that your furlough will last 30 days or less when you sign your loan agreement, or be prepared to make regular loan payments from your own funds, because you could face severe tax consequences if the furlough lasts longer,” TSP warns.
However, the government shutdown has complicated things. For workers worried about nonpayment, TSP has issued an alert about the shutdown’s impact on current loans.
“The TSP allows for the suspension of loan payments when you go into nonpay status to prevent your loan from going into default,” TSP said Wednesday in a bulletin to employees. “Normally, we require documentation from your agency or service. However, the TSP does not need documentation of your furlough at this time. If your loan payments were up to date prior to the furlough, missing one or two payments will not cause your loan to be in default. As long as retroactive pay is approved, all missed loan payments will be submitted and posted to your loan."
The suspension of loan payments includes employees who take out new loans and are not getting paid as a result of the shutdown, Weaver said.
TSP said it will keep people informed as the furlough continues.
Employees can check the status of their loans by logging into “My Account.” Go to “TSP Loans” and then select “Are my payments up to date?”
TSP account holders can also call the ThriftLine at 877-968-3778 and speak to a service representative.
Here’s a major concern I have about workers tapping their TSP: We’ve been talking about this shutdown in terms of people paying their current obligations. But federal employees taking out loans or making hardship withdrawals could see a serious long-term impact on their retirement savings.
As people play catch-up on their bills or default on their debts, they may stop making contributions to their retirement funds. This happens when employees take a financial-hardship withdrawal: They can’t make contributions to their TSP accounts for six months. I worry that some workers won’t get back into the habit of contributing to their TSP. We already know many folks aren’t saving enough for retirement.
TSP sends out a notice to employees when the six months is up to encourage them to restart their contributions, Weaver said.
“The Board recognizes that participants sometimes have to take financial hardship withdrawals,” she said. “However, it is essential for that participant to begin re-contributing after the six months suspension for the health of that participant’s future retirement.”
Also consider that when you borrow from your retirement, there are indirect costs. Yes, you may be paying yourself back, but you may also be sacrificing earnings that might have accrued on the borrowed money.
“Although you pay the loan amount back to your TSP account with interest,” TSP cautions borrowers, “the amount of interest paid may be less than what you might have earned if the money had remained in your TSP account.”
You may feel you have no alternative to tapping your retirement money. But make sure you’ve exhausted every other possible avenue before turning to your TSP.
Color of Money Question of the Week
If you’re a furloughed federal worker or contractor, how are you making ends meet? Where are you getting the money to pay your bills? Send your comments to email@example.com. Please include your name, city and state. In the subject line put “Shutdown.”
I also want to hear from you if you’re facing a lost paycheck and you don’t have an emergency fund. Tell the truth: Could you have done better with your finances?
I’m live at noon (Eastern time) today to take your personal finance questions. My guest will be Carolyn McClanahan, a certified financial planner who will take your online questions about retirement. She’ll also be able to address questions from federal employees affected by the government shutdown.
Join the live discussion by clicking this link.
It’s also Testimony Thursday. I want to hear about your financial success stories. Have you paid off debt? Do you finally have an emergency fund?
Last week I asked: How is the federal government shutdown affecting your financial life?
"My spouse is affected — deemed essential, so still working,” wrote Todd from Austin “We have a pretty good fund of our own, so we should be fine. But we know lots of her co-workers who are pretty much freaking out.”
Donna Lohmann Barker from Seattle wrote: “We are a federal family and my husband is now furloughed. He works for NOAA as a scientist. I am a psychiatrist in private practice (he is 53, I am 62). We have a 19-year-old in college (private — all cash). We will be fine because 22 years ago we finished grad school and medical school with student loan debt and we had credit card debt. We read “Your Money or Your Life” and made big changes. Since that time we have been debt free (once we paid off our student loan debt) except for our mortgage. We are a high-income family but have saved 20 percent to 25 percent of our income since then. At times I worked half time to be a hands-on mom and to care for my elderly mother. We have one car (now 10 years old) and a small house. But we do live in an expensive city and have sent our kid to private school (education is my designer bag). We have a large emergency fund (we haven’t always had this, but we do now). I think we are rare in this but I got scared 22 years ago and we changed.”
She added: “Could we have done better? Yes — for sure. But I could retire tomorrow and be fine. I won’t, in part because I like my work and because I want to travel and need to fund it. Plus, we are giving our daughter the gift of no student loan debt. She wants to save the world and now she can. Hubby loves his job and wants to get back to work.”
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