TSP to pay debt?

[blade10327]

Super quick background details: E6 with 9+ years, “High 3” retirement, married with one kid, TSP: $22,000

So me and my wife ended up in a rough situation where we were in the middle of moving into our new home and then had to pay for multiple funerals out of pocket and having to handle some financial problems for her elderly mother in law.

Our current debts are as follow:

•$9k @ 11.2% APR credit card
•$3k @ 9.7% APR credit card
•$4k @ 7.8% APR loan for home improvement
•$18k @ 0.0% APR car loan

We’ve never really carried monthly debt before the last six months so I’ve never had to deal with the stress of it and honestly I’m not too comfortable with it.

Is it worth cashing out a portion of my TSP to clear out all my interest accruing debt? I “set it & forget it” for the most part with my TSP maybe taking a look once a year if some groundbreaking news comes out on better ways to disperse it.

Prior to all this I was doing 7% contribution but right now have it at 1% to compensate for the extra monthly payments. I want to cash out, pay off, then bump up to 10% and move on.

Me and my wife are both 29 so we have plenty of time before it matures and becomes accessible obviously. I just don’t like the mental weight of this debt over my head and it just came at the absolute worst time, my wife transitioned to a SAHM for our newborn & a PCS, so these expenses really caught us off guard and I’ll prepared.

Any advice would be greatly appreciated, just wanted to make sure I’m not making a detrimental decision out of fear. Thanks in advance!

 

[holywalk]

@blade10327 No. You will pay taxes and penalties. Withdrawing early from your TSP is almost never the answer.

You can look into a TSP loan, but that depends on many factors. What's your total income and expenses? Wife work?

 

[ihasaquestion]

@holywalk Agree. Dont borrow from your future self. Work off your debts with the money you have.

 

[blade10327]

@holywalk I was aware of the penalties but wasn’t sure if they outweighed having this much debt. Mind if I PM you a small spreadsheet I have that covers my finances?

 

[jnel]

@blade10327 How's your credit? Navy Fed is running a balance transfer promo at the moment: 1% APR for 12 months on balance transfers, with no transfer fee. Other card companies also offer balance transfer deals on the regular, but most charge a transfer fee, and the rates are typically higher after the promo period. I'd explore that before even the TSP loan.

Definitely don't just cash it out, though. It's not worth it. Sit down and knock out a budget, look at your credit/checking statements, be brutally honest with how much you're paying for what, and see how much is left over each month to pay down the debt. Then you can figure out how long it'll take to pay off. At the same time, you'll have an idea of places you can cut expenses or spend less so you can pay it off quicker.

 

[blade10327]

@jnel So I just looked into it, I already have a Navy Fed Cash Preferred card so opening up wouldn’t qualify me for the transfer APR. thank you for the suggestion though!

 

[jnel]

@blade10327 Sure thing! It is also being offered for the Navy Fed Platinum.

 

[kiwisalad]

@blade10327 Think of this like treating a casualty.

Right now, You're bleeding out financially and asking about a transfusion. The right answer is to stop the bleeding. You need a tourniquet, a pressure dressing, and the recovery position.

The tourniquet: You need to stop spending on anything that isn't what your wife, your kid, and you need to live and work. You're in danger of bankrupting yourself by shouldering other people's emergencies. Continuing this can revoke your security clearance (if you have one) and effectively end your career. Until you've re-established your financial security, you are in no position to financially help anyone else, because doing so has put you into your own financial emergency. Stop all non-essential spending now, and say no to any requests for your money.

The pressure dressing: You need to manage your debt. By my math, you have $16K in high-interest debt. You have another $18K in a car loan with 0% interest, which makes me suspect this is a temporary interest rate that may jump way up on you. None of these interest rates are as bad as they could be, but they are eating away at your long-term ability to support your family and do what you want to do in life. Look at options to consolidate this debt into a lower-interest loan. If you're in the Army, AER might be an option (talk with your 1SG or commander). I *think* Navy and Air Force have similar organizations. Your goal here is to make sure you can more than meet your required monthly payments by as wide a margin as possible.

The recovery position: first, get and maintain a small cash reserve to handle immediate needs like insurance deductibles and whatever immediate needs that might come up ($500-$1K should be good) so any small stuff that comes up won't choke off your recovery efforts. Second, raise your TSP contribution to the full matching level of 5% so you aren't throwing away money like you are right now. Third, work with your wife to adjust your family's spending to the lowest level you can sustain. This is your recovery position: minimal and essential spending only, 5% TSP match, and saving every dollar you can. Get used to this; you'll be here until your debts are gone and you have a reserve big enough for your family to survive on for 6 months with no income.

Until you're out of consumer debt with a 6-month emergency fund, your finances are in a state of emergency. No more paying for other peoples' funerals, no more helping out your mother-in-law's finances, no new cars (buy a used beater if you absolutely have to), no eating out, no spending on anything else. Plan and talk about this with your wife; a good stay-at-home mom can do incredible things to stretch a budget, and she needs to be on board with this. Track your progress and celebrate it (frugally) together.

To answer your specific question, though, Don't cash out your TSP. Also, don't drop your TSP contribution below 5% unless you have no other choice. That's just throwing money away.

Don't take my word for any of this, though. Go to your base's community service center and ask to speak with the financial planners. They're good at helping folks in situations just like yours figure out a plan. If that's not an option, MilitaryOneSource works with people in this kind of situation all the time.

 

[blade10327]

@kiwisalad Yeah, we’ve cut down our spending to bare necessities so we could be aggressive with the debt but it just seems so far out of reach.

My clearance is in good standing still because my debt in the grand scheme of things isn’t much when compared to income and my minimums are payable, it’s just very much out my personal norm.

The car is truly 0% financing offered via the manufacturer back in 2022. It’s just an economical hybrid.

I’m grandfathered in to the “High 3” retirement system so I have no TSP matching incentives.

 

[kiwisalad]

@blade10327 Good! I was a little worried, having seen soldiers get screwed on 0% introductory rates and find themselves in big trouble. Since you have no matching contributions, it's better to just turn all contributions off until you're secure with no high-interest debt and a 6-month emergency reserve.

The problem, as you put it, is that "it just seems so far out of reach." The solution is to break it up into little steps and celebrate every step's completion with your wife.

According to this year's pay charts, your base pay is about $4,200. Can you save $1K per month? If so, you're not in terrible shape at all. $16K in high-interest debt is a big rock in your ruck, but it's manageable.

1. Build a small emergency fund ($500-$1K). You should be able to do this in a month, or maybe even a pay period.
   
2. Tackle your smallest debt next. $3K should be doable within a few months.
   
3. Tackle the next smallest one. $4K should be doable in another 4ish months.
   
4. Then get after that big $11K one. It'll take you the better part of a year, but it'll come faster than you might think, since you won't have payments to make on the two smaller ones.
   
5. Next, build up a 6-month emergency reserve. Put it in something that gets enough interest to stay ahead of inflation (like a money market fund).
   
6. Now turn on the spigot for Roth TSP contributions, a fund for your next car (so you won't have to borrow at all for it), your kid's college fund, and/or whatever else you want to save for.
   
7. Have a kickass party with your wife.

This is the classic Dave Ramsey debt snowball. Mathematically, this approach may not make a whole lot of sense, but psychologically, it's a lot easier to build and sustain.

You've got a pretty tight year or two ahead of you, but you and your wife can totally do this, and your marriage will be all the stronger for overcoming it together.

 

[jlinked]

@blade10327 I would suggest doing what /@jnel mentioned with navy fed balance transfer as it’s the better option, but just as information to the masses you can take out a TSP loan and pay a better (less interest rate) that would go into your own pocket (returning to your tsp). I checked yesterday and it said 4% on the loan and a small “fee” which I think was $100 to process the paperwork on the loan that goes up to 50k.

It absolutely makes sense to pay off debt sitting at a little over 9% combined (not counting the 0% car loan) and replace with a 4% tsp loan. The only scenario which it is more beneficially to keep the money in your tsp is if over the life time of the loan your returns are over 15% from tsp.

 

[jnel]

@jlinked The money you borrow from your TSP becomes un-invested from whichever fund(s) you normally use until you pay it back. So you need to also consider the opportunity cost of missing out on market gains. For reference

Since the market historically returns 10%, and since the TSP is tax-advantaged, it doesn't make sense for most people to take a loan unless you're paying at least ~13% on debt.

 

[jlinked]

@jnel Yes it becomes uninvested when you take a loan against your tsp but when you pay off debt those are guaranteed returns vs the gambl/risk of leaving it in the market. 10% average is the non inflation adjusted number which becomes 7%. We’re both making assumptions that they are currently invested aggressively enough to match the risk exposure of those historical return averages (little to no bonds, basically just 100% C fund)

If instead of paying another entity 9% interest he could pay himself 4% which just those two factors alone = 13%.

The market could go nuts and jump 20% in one year or drop 15% you never know.

 

[jnel]

@jlinked Fair enough, though I'd argue that the market swings you mention are more of an argument for staying invested. They're the whole reason you invest in the market for retirement in the first place, because overall it still trends up, and enough to outpace all other investment classes.

 

[jlinked]

@jnel Your first sentence has merit if it was a long term loan of 5-30 years. When we’re talking time frames of barely above 18 months (random timeframe based off OP’s information) it’s a complete coin flip.

With their scenario of it being a reasonable but still large-ish interest % to me it’s a no brainer to consider and even execute a tsp loan if it was their best option.

 

[blade10327]

@jlinked I just don’t like credit cards and correct if I’m wrong but won’t it be a pretty negative hit to my credit to get a card and just butcher the utilization on it?

I would ideally be able to pay everything off within the promotional window of the card but in all honesty I’m not sure if it’d be possible just circumstantially (mortgage, taxes, etc.”). We went pretty lean when we PCS’ed here, I sold my truck and toys, eliminated a lot of the splurges we partook in.

I’m not falling behind on anything but I just also feel like I’m not making enough progress because I can’t contribute to savings anymore or my son’s 529 fund.

I’m not an expert at all, I’m just keenly interested in making sure my family has what they need and eventually in the position that they can afford what they want, so I’m not sure what the smartest move is