TSP: financial hardship withdrawal

[Anonymous]

Assuming we'll meet the criteria, my wife and I are thinking of cashing out the 60K I have in my TSP to pay off 50K in credit card debt, which costs about $1200/month to service. Once complete, we can begin immediately to max out my wife's contributions to her TSP, and after waiting six months, I'll put as much as I can towards my TSP so that we can get back as quickly as possible to status quo ante. We hope to be able to maintain maximum contribution levels on both accounts thereafter. We're currently only contributing 5% of our salaries. Should we?

[Anonymous]

no

[Anonymous]

Agree, no.

[Anonymous]

Absolutely not. For one thing that's not a "financial hardship" -- that's a self-inflicted wound. You're much better off defaulting and having your credit destroyed. You don't need or deserve credit anymore anyway.

[Anonymous]

Why not? Wouldn't the benefit of putting $1200/month towards a tax-deferred account outweigh the costs of servicing 50K in credit card debt? I know the conventional wisdom is to not touch retirement accounts, but doesn't this advice apply more to people with more robust accounts (60K isn't a lot of money)? With maximum contributions we can get back to 60K within 3 years. And I wouldn't expect to lose out too much on compounding interest over the next 3 years---if the next 3 are anything like the past 3.

[Anonymous]

No. I wouldn't. I would do everything I could to cut expenditures to pay off the debt. I would stop contributing to the TSP till I had paid down the credit card debt. Set a realistic goal for a timeframe for doing this - one year, two years.

[Anonymous]

You understand that the money you withdraw from the TSP would be taxed, right? Plus it may be subject to an additional 10 percent penalty?

[Anonymous]

I understand. I haven't run the numbers to know exact figures, but I'm thinking that after taxes and penalties the 60K would wipe away most of the 50K credit card debt. It would be a way for us to hit the reset button.

I'm thinking that if we don't do it, then in 3 years we'll have not much more than 60K in my TSP (we're only contributing 5%), and we'll probably still have significant credit card debt. If we move forward with the withdrawal, we can have 60K in my TSP in 3 years and no credit card debt. The latter seems more appealing than the former.

[Anonymous]

Anonymous wrote:Why not? Wouldn't the benefit of putting $1200/month towards a tax-deferred account outweigh the costs of servicing 50K in credit card debt? I know the conventional wisdom is to not touch retirement accounts, but doesn't this advice apply more to people with more robust accounts (60K isn't a lot of money)? With maximum contributions we can get back to 60K within 3 years. And I wouldn't expect to lose out too much on compounding interest over the next 3 years---if the next 3 are anything like the past 3.

Well for one thing, $60K in TSP money isn't going to wipe out $50,000 in debt. You might net $29,000 once you pay taxes and the penalty.

Also, excuse me for scoffing at your pledge that you'll have financial discipline now. You ran up $50,000 in cc debt. Why not just take all that money you were going to theoretically invest in your depleted TSP and just pay off the debt? You didn't get $50,000 in debt overnight, and you can't pay it off overnight, short of a windfall (and this doesn't count).

Don't compound your financial irresponsibility with another stupid mistake.

[Anonymous]

P.S. I truly appreciate your responses!

[Anonymous]

Anonymous wrote:

Anonymous wrote:Why not? Wouldn't the benefit of putting $1200/month towards a tax-deferred account outweigh the costs of servicing 50K in credit card debt? I know the conventional wisdom is to not touch retirement accounts, but doesn't this advice apply more to people with more robust accounts (60K isn't a lot of money)? With maximum contributions we can get back to 60K within 3 years. And I wouldn't expect to lose out too much on compounding interest over the next 3 years---if the next 3 are anything like the past 3.

Well for one thing, $60K in TSP money isn't going to wipe out $50,000 in debt. You might net $29,000 once you pay taxes and the penalty.

Also, excuse me for scoffing at your pledge that you'll have financial discipline now. You ran up $50,000 in cc debt. Why not just take all that money you were going to theoretically invest in your depleted TSP and just pay off the debt? You didn't get $50,000 in debt overnight, and you can't pay it off overnight, short of a windfall (and this doesn't count).

Don't compound your financial irresponsibility with another stupid mistake.

Sorry, make that $39,000. You'd lose $21,000 to taxes and penalty.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Why not? Wouldn't the benefit of putting $1200/month towards a tax-deferred account outweigh the costs of servicing 50K in credit card debt? I know the conventional wisdom is to not touch retirement accounts, but doesn't this advice apply more to people with more robust accounts (60K isn't a lot of money)? With maximum contributions we can get back to 60K within 3 years. And I wouldn't expect to lose out too much on compounding interest over the next 3 years---if the next 3 are anything like the past 3.

Well for one thing, $60K in TSP money isn't going to wipe out $50,000 in debt. You might net $29,000 once you pay taxes and the penalty.

Also, excuse me for scoffing at your pledge that you'll have financial discipline now. You ran up $50,000 in cc debt. Why not just take all that money you were going to theoretically invest in your depleted TSP and just pay off the debt? You didn't get $50,000 in debt overnight, and you can't pay it off overnight, short of a windfall (and this doesn't count).

Don't compound your financial irresponsibility with another stupid mistake.

The $1200 I'm currently paying to service the debt would go towards making the TSP whole again. I don't have an extra 1200/month to pay down the debt.

And I wasn't thinking I'd take that big a hit on the withdrawal. That's more than 50%!

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Why not? Wouldn't the benefit of putting $1200/month towards a tax-deferred account outweigh the costs of servicing 50K in credit card debt? I know the conventional wisdom is to not touch retirement accounts, but doesn't this advice apply more to people with more robust accounts (60K isn't a lot of money)? With maximum contributions we can get back to 60K within 3 years. And I wouldn't expect to lose out too much on compounding interest over the next 3 years---if the next 3 are anything like the past 3.

Well for one thing, $60K in TSP money isn't going to wipe out $50,000 in debt. You might net $29,000 once you pay taxes and the penalty.

Also, excuse me for scoffing at your pledge that you'll have financial discipline now. You ran up $50,000 in cc debt. Why not just take all that money you were going to theoretically invest in your depleted TSP and just pay off the debt? You didn't get $50,000 in debt overnight, and you can't pay it off overnight, short of a windfall (and this doesn't count).

Don't compound your financial irresponsibility with another stupid mistake.

The $1200 I'm currently paying to service the debt would go towards making the TSP whole again. I don't have an extra 1200/month to pay down the debt.

And I wasn't thinking I'd take that big a hit on the withdrawal. That's more than 50%!

I already posted that it was $39,000, not $29,000 (a typo). That's 35%, not 50%.

I assumed you're in the 25% bracket and added the 10% penalty.

But no matter how you slice it, you're not going to have enough to wipe out $50,000 in cc debt by liquidating your TSP. Dumb upon dumb.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Why not? Wouldn't the benefit of putting $1200/month towards a tax-deferred account outweigh the costs of servicing 50K in credit card debt? I know the conventional wisdom is to not touch retirement accounts, but doesn't this advice apply more to people with more robust accounts (60K isn't a lot of money)? With maximum contributions we can get back to 60K within 3 years. And I wouldn't expect to lose out too much on compounding interest over the next 3 years---if the next 3 are anything like the past 3.

Well for one thing, $60K in TSP money isn't going to wipe out $50,000 in debt. You might net $29,000 once you pay taxes and the penalty.

Also, excuse me for scoffing at your pledge that you'll have financial discipline now. You ran up $50,000 in cc debt. Why not just take all that money you were going to theoretically invest in your depleted TSP and just pay off the debt? You didn't get $50,000 in debt overnight, and you can't pay it off overnight, short of a windfall (and this doesn't count).

Don't compound your financial irresponsibility with another stupid mistake.

The $1200 I'm currently paying to service the debt would go towards making the TSP whole again. I don't have an extra 1200/month to pay down the debt.

And I wasn't thinking I'd take that big a hit on the withdrawal. That's more than 50%!

The other thing is you mentioned fully funding the TSP again once you liquidated.

Fully funding for you and your wife means $34,000 a year in contributions. We presume that if you have an extra $20,000 a year to fully fund (on top of the $1,200 you're paying towards cc every month), that money could be used to accelerate payments on the debt.

Or were you exaggerating about your ability to full fund and replenish your TSP? The cap is $17,000 a year per worker. Might be $17,500 now, actually.

[Anonymous]

Call each of your credit cards and say you are evaluating consolidating your debt via this method (in reality I hope you are changing your mind). Tell them if they consider lowering your rate that you will keep your debt with them.

This should net some savings.