For federal employees as well as members of uniformed services, the retirement options differ from those in the private sector. They are entitled to FERS retirement benefits, including Thrift Saving Plan (TSP) and Social security.
Most federal employees consider investing in TSP for a more secure retirement. TSP is just like a private-sector 401K plan, offering investment options for federal employees and members of uniformed services to help them save for retirement.
If you have a TSP account, you may be contributing at least 5% of your pay to take full advantage of the federal government’s matching funds. While these contributions may seem like significant planning for retirement, there is one pitfall for most TSP investors — an unpaid TSP loan.
What is a TSP loan?
When you have a TSP account, you are entitled to take out a loan against your contributions, similar to taking out a loan against a private-sector 401k plan.
● Two types of TSP loans are available for TSPO account holders, namely General-Purpose loans and Residential loans.
● A General-Purpose loan can be taken out for any reason and must be repaid within 5 years.
● A Residential loan can only be taken out to buy or build a primary residence and must be repaid within 15 years.
Heading into retirement with a TSP loan
If you have a TSP loan on your head and nearing your retirement, you may have to do some additional planning. If possible, try to repay your loan before retiring for a better quality of retirement living with peace of mind while enjoying your FERS retirement and Social security benefits.
To repay your TSP loan before retirement, you can make additional payments each month by sending a cheque along with your loan payment coupon. You can also pay the amount in a lump sum or use your tax refunds to pay it faster.
However, if you think you will not repay your loan before retirement, you can still retire with an outstanding loan with no pressure from the government or your employer. That said, Paul Haarman explains that there are some disadvantages to this, which you should be aware of.
The law requires the Thrift Savings Plan to report any unpaid loan — whether it is a General-Purpose Loan or a Residential loan — counting it as a taxable loan distribution. Borrowers have a 90-day grace period to repay it before this happens.
If you cannot pay the remaining amount with the 90-day grace period, you will have to pay income taxes, both federal and state, at your regular rate on the remaining balance and interest.
Depending on the balance, this could be a tax trap, eating up your refund and affecting your peace of mind in retirement.
If you are entering into retirement with an unpaid TSP loan, let the experts help you understand what you can do to pay it off and how you can have a more secure financial future with better FERS retirement benefits. Paul Haarman suggests that you must always consider experts for better planning and getting the desired outcomes in the future.
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