Considering TSP Withdrawal to Pay Off Mortgage

If you are considering withdrawing from your TSP to pay off your mortgage, please know that doing so could come with significant tax consequences and if you’re younger than age 59 ½, it could also entail a 10% early withdrawal penalty.

Let’s assume that someone has a TSP balance of $300,000. Below is a table of select income ranges and the corresponding tax rates.

If a couple has income before the withdrawal of $90,000 or a single filer has income of $45,000 and withdraws $125,000 to pay off a mortgage, the total income would now be $215,000 for the married filers and $170,000 for the single filer. The married filers go from the 22% to the 24% tax bracket, but the single filer goes from the 22% to the 32% tax bracket!

To have $125,000 after taxes, at the 24% tax rate, the total withdrawal would have to be $164,474 for the married filers, but a whopping $183,824 for the single filer. Withdrawals of these amounts would leave to TSP balance of $135,526 ($300,000 - $164,474) for the married filers and $116,176 ($300,000 - $183,824) for the single filer.

At a 5% payout or distribution rate, $300,000 has the potential to provide as much as $15,000 in annual income or $1,250 per month, but with a balance of $135,526 at 5% only provides annual income of $6,776 or $565 per month (for the joint married filers) and for a single filer, a balance of $116,176 at 5% would provide annual income of $5,809 per year or $484 per month.

This information does not constitute tax advice. You should consult with your tax professional as it pertains to your individual situation.