CSRS Retirement eligible in July and possibly need a TSP loan before then

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Hello, I can retire under CSRS when I turn 55 in July with 38 years federal service. I would prefer to wait a few more years, but my husband is sick and I don’t know if I will have to retire. If I took out a TSP loan this year, am I penalized the extra 10% if I can’t pay it back before I retire? I understand I have to pay taxes on the amount not paid back, but I’m unclear about the penalty.

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Posted by (Questions: 1, Answers: 1)
Asked on January 16, 2019 6:17 pm
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If you took out a loan prior to your retirement and were unable to pay it back before you retired, you would be given a chance to pay it back after you retired (generally within 90 days of retirement). If you didn’t pay it back within that period, the TSP would declare the outstanding balance of the loan to be a taxable distribution and you would be responsible for federal income tax on that amount. Whether or not you would be responsible for state income tax would depend on the state where you live.
As you will retire no earlier than age 55, you would not be subject to the 10% early withdrawal. The TSP (and other employer sponsored plans) have different rules on early withdrawal penalties than do IRAs. With the TSP, if you separate from federal service in the year in which you reach 55 (or later), there will be no penalty assessed. Because the outstanding loan would not become a distribution until you separate (at 55 or later), there is no penalty in your case.

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Answered on January 17, 2019 1:13 pm
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Thank you so much for your quick response.

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Posted by (Questions: 1, Answers: 1)
Answered on January 17, 2019 2:15 pm