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. 

 

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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.