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Cashing out TSP

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ulf67
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Cashing out TSP  Reply with quote  

I am in federal law enforcement. I will be able to retire in about 1 year and 11 months, at age 50 with 26 years of service. Looking at the math, my pension with the social security supplement will be about 54k a year.

I will estimate around 300k in my TSP at that time (bad divorce).

Having moved so much, I have never built up equity during my moves. I estimate I will only have about 40k in equity.

I am trying to determine what the penalties are for early withdrawal. I have read about the 10% early w/d penalty and the employer holding 20% for taxes. It looks like they also hit you for federal taxes? or is that part of the 20%?

If I am able to buy my land and home with the cashed out money (lets say 270k to 200k after taxes, I would not have to work (at a real job) I could turn some hobbies (making furniture, blacksmithing etc) into small time fun work and live comfortably off my pension and have some of that money left over to boot.

Thank you in advance for any sage advice.
Post Thu Feb 12, 2015 1:31 am
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Wino
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Re: Cashing out TSP  Reply with quote  

quote:
Originally posted by ulf67
I am in federal law enforcement. I will be able to retire in about 1 year and 11 months, at age 50 with 26 years of service. Looking at the math, my pension with the social security supplement will be about 54k a year.

How do you expect to get SS at 50? Am I reading that wrong?
quote:
Originally posted by ulf67
I will estimate around 300k in my TSP at that time (bad divorce).

Having moved so much, I have never built up equity during my moves. I estimate I will only have about 40k in equity.

I am trying to determine what the penalties are for early withdrawal. I have read about the 10% early w/d penalty and the employer holding 20% for taxes. It looks like they also hit you for federal taxes? or is that part of the 20%?

The 20% is the withholding, just like the federal withholding from your paycheck. It is what is given to the government in anticipation of you using it to pay your taxes due.

Now, let's look at those taxes. You withdraw $300K. They put $60K into your federal tax account, and you don't get it. Your income for that year will now be $300K plus your actual income. Not knowing your income (this is for illustration, anyway), I'll just guess it is $50K, because I like easy math.

Now, your income for the year is $350K. You will get maybe $20K in deductions, so your taxable income is $330K. The taxes on that are going to be in the neighborhood of $95K so you have to send an additional $35K to the IRS.

Now, you'll also owe $30K as your penalty. Total fees to the IRS = $60K + $35K + 30K, for a grand total of $125K, leaving you roughly $215K minus your social security, medicare, and other payroll deductions on the $50K of normal income. Your $300K became about $180K for you to spend. You paid the equivalent of 40% in taxes on that money, more or less.

quote:
Originally posted by ulf67
If I am able to buy my land and home with the cashed out money (lets say 270k to 200k after taxes, I would not have to work (at a real job) I could turn some hobbies (making furniture, blacksmithing etc) into small time fun work and live comfortably off my pension and have some of that money left over to boot.

You won't have any money left over, and you'll still need a mortgage to buy the place.

You would be better served to use the TSP and your pension to get a traditional mortgage and pay it off as quickly as you can. Withdrawing retirement funds early is never a good idea.
Post Thu Feb 12, 2015 1:56 am
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oldguy
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ulf67, Like wino says - you don't want to cash out that $300k, that huge chunk of income in one yr puts you in the 39% Fed bracket, plus your highest state income tax bracket, plus the 10% penalty for pre-age 59 1/2 .

Instead, leave the $300k where it is until age 59 1/2 (to avoid the $30k penalty), then take out smaller chunks (to avoid the 39% tax bracket). And put mortgages on your real estate to carry you for a few yrs. The 4% or 5% that you pay for the loans is way cheaper than paying 40% to 50% in taxes/penalties.
Post Wed Mar 11, 2015 1:34 pm
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fyaseo
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Great advice by old guy Smile
Post Fri Mar 13, 2015 6:35 am
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music23
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It look easy for us to get the free musical.ly followers online so that we get the likes and fans for the musicallly
Post Sat Nov 04, 2017 6:53 am
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