Paying off a home is something we all strive to do; however, is it worth it to use funds from your Thrift Savings Plan (TSP)? The short answer is that it depends on your situation. To figure out if it’s the right decision for you, you can ask yourself a few questions.
- What is the payoff amount for my mortgage?
- What is the interest on the loan?
- What is the monthly premium (principle, interest, homeowners insurance, and property taxes?
- How much longer do I have to pay on this loan? Is there a prepayment penalty?
- Even after I retire, I will continue to pay homeowners insurance. How much of this premium is paid for homeowners insurance?
- I will continue to pay property taxes. How much of this premium is for property taxes?
What should you do?
Shirley has just turned 60 years old. She is considering paying off her mortgage with some of her TSP funds when she retires. Her payoff is $240,000.00. The interest rate on her mortgage is 5%. Her premium is $1,145.00 per month and includes $100.00 for homeowners insurance and $400.00 for property taxes. Here’s two examples of how Shirley could use her TSP to pay off her mortgage.
Scenario One: Take Money Out of the TSP
Taxes are taken out automatically when you take money from your TSP. With a tax rate of 20%, Shirley will need to take out $300,000.00 from her TSP to end up with $240,000.00 to pay off the balance. This $300,000.00 will then be added to her taxable income for the year, which will move her into a 37% tax bracket. She is currently in a 22% tax bracket.
Her home would be paid off, but she will continue to pay the current homeowners insurance and property taxes which are $6,000.00 per year ($500.00 per month). These payments will come out of her retirement income.
Scenario Two: Roll TSP Funds Into a Fixed Index Annuity
As an alternative, Shirley could roll the same $300,000.00 into a Fixed Index Annuity account. She would immediately receive $1,200.00 per month, with the potential to grow as the market grows. She will only be taxed on the $1,200.00 per month ($14,400.00 per year), which would keep her in the 22% tax bracket.
She could use this money to pay off her mortgage over time. When the house is paid in full she will continue to draw this income for the rest of her life. This is more than enough to cover her homeowners insurance and property tax ($500.00 per month) without having to touch her other retirement income.
If Shirley passes away before the home is paid off the remaining principle in the fixed index annuity account can be used to pay the home off.
Explore Your Options
Your decisions regarding your Thrift Savings Plan are irrevocable and can affect your retirement income significantly. Whether you’re in a similar scenario to Shirley or if your situation is very different, United Benefits Retirement Specialists are here to help you explore your options. Fill out the form below to get in touch.