TSP Loan vs Hardship Withdrawal Which Is Less Damaging

Ladies and gentlemen, federal employees, what if you're still working, you're still an active federal employee, and you need money, what are some ways you can tap your TSP, you probably have a healthy TSP, if you're near your retirement, what are some ways you can get in there? And what are the pros and cons for all the different options? And really here they are, you can take a loan TSP loan, you can take in hardship, hardship withdrawal, or an in service withdrawal. But depending on what age you are, you can only do one or the other. So let's dive in. Now if you're new to the channel, welcome. My name is Dallin Hawes. I'm a financial planner. I serve federal employees every single day helping them retire, get the most out of all the stuff. I love it. Let's dive in. Let's talk about loans. So many of you have heard about a TSP loan. Many of you have taken a TSP loan. Let me walk you through there's two different types of TSP loans as a general loan and in a home loan. Long story short, a general loan has to be paid back between one and five years. A residential loan can go up to 15 years, the interest rate is the same as whatever the g fund is. Obviously, I'm filming this at a time when you're not watching, it's gonna be different. But these days, we're talking anywhere from three to four ish percent is the ballpark. So overall, it's a pretty good interest rate. And this interest rate, you actually pay back into your TSP. So let me just give a random example. I'll keep the numbers easy. You took out $100,000 a TSP loan, normally the cap is 50,000. But let's say just for easy math, let's say you took a TSP loan of 100 grand. That means if you had it for a year, you'd pay $3,000 of interest, which is that's great compared to what you can get in the private sector, at least as of right now. And again, you pay that interest to yourself. But here's the big downside. Here's the cost. Your money, let's say in our example 100,000 or 50,000, whatever it is, wasn't in the market to grow during that time. So maybe it costs you an extra three grand interest, but of course you pay it to yourself. But what would that 10,000 had had been what would have grown to? Had you just kept it in there? Would it have grown to 110 150? Whatever the number is, right? If you were able to leave it in there to grow, that's the main thing. So it may cost you 10,000 of lost growth, because the money wasn't in there. Now with the TSP loan, you get the money back in there eventually, which is nice. But that is the loan option, you can take a loan, you pay it back over time from your paychecks. Here's the next option, you can take a hardship, withdraw a hardship, withdraw long story short, they're short, there's a few different situations that the government says, Look, if you've got these sort of hardships, then you can take out a withdrawal from your TSP. Now I'm not going to go over all the ones you can look them up. If you think this is going to if you have a financial hardship, like for example, if you are in a nationally declared disaster area, then you can apply for it. And there's other things like if you're going through divorce, you have a bunch of legal fees, you can use it for that sort of thing. There's a bunch of criteria you can hit, you can look into that if you think you might qualify. If you do, then you can take a withdrawal. That is the key word. This is not a loan, you're not paying this money back. This is a hardship withdrawal. And if you are under 59 and a half, you have to pay taxes like normal on your on your money, but also a 10% early withdrawal penalty. That's just how TSP and other retirement accounts work. If you touch the money before 59 and a half. Yes, you have to pay taxes and a 10% penalty. Let me give an example of how this might work. Let's say you take $10,000 as a hardship withdrawal. Let's say you pay 20% in taxes, let's say that's your tax bracket. And on top of that, you'd pay 10% in a hardship withdrawal. So you'd actually only net 7000 from the original 10 gross. That's the sort of thing you'd be paying is first taxes both on the federal and state level depending on your state, and then an early withdrawal penalty. Now, if you are over 59 and a half, that is when the next type of withdrawal would come into play, which is called an in service withdrawal. And in service withdrawal happens by definition after 59 and a half. If you are over then you avoid the 10% penalty, you don't have that, which is exceptionally awesome. Okay, we like avoiding that. Now, there's no way to avoid the taxes, especially if you're pulling from the pre tax side. If you're pulling from the traditional pre tax TSP, there's no way to avoid the taxes, even with an insert in service withdrawal, but at least you will avoid the 10% early withdrawal penalty. So let me give an example of how this one might work. So let's say you're still working and you're 61 years old. Okay, so 61 years old, still working, let's say you're going to work another five years, and something big comes up and you want to pull it from TSP. Okay, let's say you take the 10,000 out. Let's say you pay 20% in taxes. Okay, so you're left with $8,000 net. And that 8,000 you could do whatever you want. But of course, you're not paying it back into your TSP. That's not happening. This is a withdrawal. And so your TSP is permanently reduced because of that withdrawal. All this to say, let's actually compare some of these side by side, which of them are better? Which of them is better? Now, look, none of these options are great options. It is the honest answer. The ideal option is you've got an emergency fund that you use that and you don't have to touch TSP. That's in an ideal world. But I understand we're not talking about an ideal world. So if we're not talking about ideal, what's the best option out of all of these? Well, I put it in the following order. First, a TSP loan. Second, an in service withdrawal being your over 59 and a half. And third, a hardship withdrawal. Because of course, this comes with a 10% penalty. I don't like loans, right? But if you're going to get a loan, might as well pay the interest to yourself. And you get that money back into your TSP over time. But of course, just know the money when it's not in there, it's not growing. And then of course, the second one in the middle is an in service withdrawal, which means your own over 59 and a half. But of course that permanently, that permanently reduces how much is in your TSP. So those are the options while you're still working. Obviously, when you are retired, you can take withdrawals. But then of course, you have taxes as well. There's no way to escape taxes. Whether you do it while working or in retirement, taxes are always a thing if you want to if you want more strategies about how you can reduce your taxes in retirement. We've got tons of videos here on the channel all about that. So definitely go check those out. I hope that's helpful, guys. I will see you in the next one.