On the one hand, you have a mortgage and a mortgage payment, and on the other, you have your TSP, which you’ve built up through hard-earned savings over time. Retirement is looming, and the thought of owning your home outright and having no mortgage payment is awfully attractive. The thought has crossed your mind that you could use some of what you’ve saved in your TSP to pay off your mortgage, but should you?
Usually, the answer is no.
The biggest reason not to use your TSP is typically taxes. If you’ve contributed to the traditional side of the TSP with pre-tax dollars, you’ll need to pay tax on the withdrawal of those funds. So, were you to withdraw $50,000 to pay down your mortgage, the IRS would treat that as $50,000 in income and tax it accordingly. If you’re in a 24% tax bracket, you’d owe another $12,000 in Federal tax, and you might also owe state tax depending upon the state in which you live.
To make matters worse, if you haven’t separated from service and are under age 59 1/2, you’d owe an additional 10% early withdrawal penalty. If you have separated from service and are 55 or older, there is no early withdrawal penalty for the TSP, but you will still owe income tax.
Taxes on withdrawals from the Roth are less onerous. Since you’ve already paid tax on your Roth contributions, there is no tax on a withdrawal of contributions. There is, however, tax on the earnings of those contributions unless (a) 5 years have passed since January 1st of the year in which you made your first Roth contribution, AND (b) you are age 59 1/2 or older, permanently disabled or deceased.
Because of the tax liability associated with withdrawals, a loan might make more sense for you if you are still working for the Federal Government. Note that if you’re planning on using a loan to pay off your mortgage, you’ll need to look to the general purpose loan, and we outline details on that and general information on loans below.
