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Cash out TSP/Def. Comp for home purchase???
Old 10-08-2009, 01:04 PM   #1
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Cash out TSP/Def. Comp for home purchase???

Interested in opinions information regarding cashing out my TSP/Deferred Comp to use as a down payment on a home. My "regular" emergency/vacation/car purchase fund are just for those purposes. I am in a position now where I am just too young to draw either of two pensions (military and state) Whichever I choose to "retire" from first - whether on active duty military or as a state employee, that pension will be paid the month following official retirement - then the other one will be paid at 59 (mil reserve) or 60 (state). I list these since my TSP/Def. Comp is not my primary retirement $$$ at all - I really don't even use this $$$ in my FIRECALC or spreadsheets....(should be ok with pensions & VA disability to maintain current lifestyle - after all - most of my "today" $$$ is funding my savings (TSP, emergency, car, vacation, etc)

Dare I?? Your opinions greatly appreciated.
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Old 10-08-2009, 01:17 PM   #2
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There are probably too many unexplored variables to allow a definite answer (is the house itself a good investment? Will you have enough $$ to get by until all your pensions start to flow and then SS? ). I'd recommend doing a spreadsheet with both scenarios and see if the monthly money works both ways over time and which scenario leaves you best off (net worth) at age 65. Include projected appreciation on the house and any tax benefits above the standard deduction (which you'd get regardless) from owning a home. Without any more info, I'd say that buying a home now (vs renting) as a long-term proposition is probably a good idea. After 10 years, you'd probably be better off. But, do the math.

One thing for certain--don't close out your TSP account entirely. After you leave the service you can still transfer $$ into the account, and those low fees and the G Fund investment option aren't available anywhere else. You can't open a TSP account after you leave the service, but you can contribute to one that is open. Keep that option available, you never know . . .
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Old 10-08-2009, 01:26 PM   #3
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My apologies - no intention of "closing" just taking out lots of the $$$ there for a "home purchase" which is one of the allowable withdrawal situations. I will continue to max out my contributions to meet IRS limits while employed.
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Old 10-08-2009, 02:39 PM   #4
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You can't contribute to TSP after you leave service unless you are a government employee.
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Old 10-08-2009, 02:51 PM   #5
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You can't contribute to TSP after you leave service unless you are a government employee.
Correct, but I will be maxing out (IRS limits) to my TSP (and/or State Deferred Comp) as long as I am still a squid active or drilling member of the Navy Reserve. This will be for at least 9-11 years after the home purcase. (just got commissioned, so this gives me years to continue my service, and just more than doubled the military pension dollar amounts I had calculated retiring with)
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Old 10-08-2009, 03:51 PM   #6
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Fireup,

If I was in your shoes, I wouldn't tap my retirement savings to buy a home. Instead of putting money into these accounts now, put it into saving for a down payment. I would also tap my other savings, leaving enough for any planned vacation in the next yr and some for repairs. While I'm saving for a down payment, if a true emergency popped up, I would use my credit card and decide whether to pay off the bill (with my down payment money) or cash flow it for several months. If a great house came along between now and the time I had a down payment in hand, I would go to the seller and ask about leasing first or lease/purchase agreement. If that failed, I would wait for the next great house to hit the market, I guess just trying to tell you that you have time.

Good luck to you, my nephew is finishing up ROTC and will be commissioned in May.

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Old 10-08-2009, 04:43 PM   #7
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You can't contribute to TSP after you leave service unless you are a government employee.
Not true. If you have an existing TSP account, you can contribute to it after you separate from government service.

I learned this right here on this board a year ago from Gardnr--it surprised me, too. See this thread. You can roll existing 401K accounts from other employers into it after you leave their employment--this can be a good deal.
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Old 10-08-2009, 05:24 PM   #8
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Dunno all the variables, but this might be one situation where a TSP loan might make sense vs. a withdrawal.....just something to consider. I'm making a huge assumption here that TSP loans are similar to 401k loans. In our plan for example, loans for home purchase get 10yr terms vs 5yr for other purposes.
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Old 10-08-2009, 06:04 PM   #9
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Not true. If you have an existing TSP account, you can contribute to it after you separate from government service.

I learned this right here on this board a year ago from Gardnr--it surprised me, too. See this thread. You can roll existing 401K accounts from other employers into it after you leave their employment--this can be a good deal.
Yes, you can roll a 401K into it, but you can't contribute to it just using your paycheck is what I am getting at.
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Old 10-08-2009, 06:08 PM   #10
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I personally wouldn't use my TSP unless I had to.

Since I started putting money into the TSP in 2003, I am actually up close to $2K even after the stock market downturn....
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Old 10-08-2009, 06:53 PM   #11
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You may get a lot of advice on this thread, but I am loathe to give you advice. Instead, I will just tell you what I did and I really DID put my money where my mouth is. I didn't take a loan from my TSP for a down payment for my house. I contributed the maximum to my TSP, went into LBYM mode, and saved enough for a down payment on an inexpensive but nice little house which I bought in 2002. I never contributed less than the max to my TSP then, or ever, even later while I paid off my house.

Making the TSP a first priority was my choice, and while it may not be right for everyone, I know that it was the logical and correct decision for me. Today, my TSP is the backbone of my retirement plan and it was all in G Fund during the recession so it did not lose value. Meanwhile, my small house did not lose value to the extent that was lost by luxury homes here.
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Old 10-08-2009, 07:56 PM   #12
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Originally Posted by Fireup2025 View Post
Interested in opinions information regarding cashing out my TSP/Deferred Comp to use as a down payment on a home. My "regular" emergency/vacation/car purchase fund are just for those purposes.
Dare I?? Your opinions greatly appreciated.
Are you talking about "cashing out" as in, "taking out money and paying a penalty as well as taxes"? Yikes.

Do you have a Roth IRA from which you can withdraw $10K (first-time home purchase) and any/all contributions you've made over the years? That's all penalty-free.

As another poster's already mentioned, what about a TSP/401(k) loan instead of a withdrawal?

I can see not messing with the emergency/car purchase funds. But how big is the vacation fund?

How much can you save between now and the down-payment date?

How would you feel if you cashed out, paid taxes & penalties, bought the place, and then watched its value plunge another 25%?

I'm going to just skip over all the jokes about investing in NJ real estate...
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Old 10-08-2009, 07:58 PM   #13
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Are the house values down in the area you are thinking of buying and do you qualify for the first time home buyer credit ? If so I'd probably take a little from my TSP for a down payment and finance the rest since interest rates are so low . Depending on where you are buying you may make a lot more on your money than the TSP is paying .
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Old 10-08-2009, 08:24 PM   #14
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Are you talking about "cashing out" as in, "taking out money and paying a penalty as well as taxes"? Yikes....
My understanding is cashing some of it out for a home purchase saves you from early withdrawal penalties. Where else do I have a suitable downpayment of $50-100K, definitely not in regular savings??!! Welcome to NJ!

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Do you have a Roth IRA from which you can withdraw $10K (first-time home purchase) and any/all contributions you've made over the years? That's all penalty-free.
No, for once there is a good reason to invest in a Roth! (for me)

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As another poster's already mentioned, what about a TSP/401(k) loan instead of a withdrawal?
Thought the withdrawal or loan was equally tragic to the end - but I don't use my TSP for any of my retirement calculations since I have the pensions...so it would just be used for sailboats, RV upgrades, vacations, etc...

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I can see not messing with the emergency/car purchase funds. But how big is the vacation fund?
Not large enough! (only about $5-7K)

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How much can you save between now and the down-payment date?
There is no date set...wanted to know if I could house hunt!

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How would you feel if you cashed out, paid taxes & penalties, bought the place, and then watched its value plunge another 25%?
Home or TSP/DC?

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I'm going to just skip over all the jokes about investing in NJ real estate
...Thank you - but I still love this place...not necessarily for the right reasons, but for my reasons!
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Old 10-08-2009, 08:47 PM   #15
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Where else do I have a suitable downpayment of $50-100K, definitely not in regular savings??!!
If you can't possibly save $50K for a down payment for the house, and if that is the minimum in NJ, maybe this is a good time to think about whether you can really afford a house in that location at this time. Not meant to be a criticism, but just something to think about.
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Old 10-08-2009, 08:54 PM   #16
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If you can't possibly save $50K for a down payment for the house, and if that is the minimum in NJ, maybe this is a good time to think about whether you can really afford a house in that location at this time. Not meant to be a criticism, but just something to think about.
I think that came out wrong! My TSP is the only place at this time where that kind of $$$ is available. If I put that kind of $$ into regular savings instead of off the top TSP/DC, won't I have to pay taxes? That is why I have been maxing out my TSP/Deferred Comp - because it saves me money on my taxes, and I thought you COULD use it penalty-free for home purchase. (no taxes until you needed it was the general thought) Heck, I could cash out my TSP and BUY a house outright in other areas, but not in the cards...
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Old 10-08-2009, 08:59 PM   #17
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I think that came out wrong! My TSP is the only place at this time where that kind of $$$ is available. If I put that kind of $$ into regular savings instead of off the top TSP/DC, won't I have to pay taxes? That is why I have been maxing out my TSP/Deferred Comp - because it saves me money on my taxes, and I thought you COULD use it penalty-free for home purchase. (no taxes until you needed it was the general thought) Heck, I could cash out my TSP and BUY a house outright in other areas, but not in the cards...
I think that it is great that you are maxing out the TSP, as you are, and I am not suggesting that you change that. But if you cannot also save a down payment at the same time, maybe it is time to think about whether you can afford the house and the expenses of maintenance, repair, updating, and so on that it may entail. Again, it's not meant as a criticism but just something to think about so that you are sure.
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Old 10-08-2009, 11:42 PM   #18
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With the caveats that I am not a TSP expert (just wish I and every America could contribute to it), I am not an Real Estate expert, and know absolutely nothing about NJ Real Estate, here is my $.02 worth.

I don't think withdrawing (or probably preferably borrowing money) from your TSP account is a bad idea at all. However, and this is really important you need to feel that housing prices in NJ will be significantly higher several years (10%+) from now than they are today in order for this to make financially sense. (There are psychological advantages and disadvantage to home ownership which have be discussed before which I am ignoring).


The money you are borrowing from the TSP is quite expensive, because you are having to pay taxes on it and are losing the benefit of tax free compounding. On the other hand assuming a 20% down you are getting 5:1 leverage, so if real estate appreciates say 20% in the next few years you are getting a 100% (i.e. doubling) your money, which almost certainly better return than any of options in your TSP will offer.

I can even make that case that expiration of the 1st home owners tax credit, the coming of winter in NJ (burr), the likely grim economic news, this coming winter maybe the best in our lifetimes to be a home buyers and the likelihood of finding bargains is great. In many places in the countries homes are more affordable than anytime in the past 20 years and some place more affordable than they have been since keeping statistics.

On the other hand, I am personally pessimistic about the real estate market and wouldn't be at all shocked if we see an additional 20% decrease in home prices in which you will have effectively lost TSP money and kiss those sailboat and nice vacation dreams good bye..

If you do decide to take money out, since it getting near the end of the end year, I'd highly recommend seeing if you can take the money 1/2 in 2009 and 1/2 in 2010 in order to minimize the tax consequences. This may require a combination of loan and withdrawal, consult with your TSP expert LOL.
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Old 10-09-2009, 04:39 AM   #19
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I'd recommend doing an NPV calculation based on the equity portion of the loan compared to renting (as presumably you're doing now). If you can get the TSP money with no penalties, and the NPV is positive, then I'd do it. Use only the equity portion of the amortization schedule to determine the cash flow to use in the NPV model.

In other words, if you're renting today, then you are essentially building zero equity. If you buy, then a portion of the payment goes to equity and this portion is essentially a cash inflow to your asset base. The discount rate you should use should be zero unless you also want to include the estimated housing price increase based on the full value of the home (which I would advise against since I think attempting to estimate future housing value increases is impossible).

Of course I'm a firm believer in 15-year fixed loan max. As I advise friends and family about finances, I suggest to them that if they need a 30 year loan to afford the house, they should be buying a smaller house. Can't wait until 2013 for our loan to be paid off, I'll be 52 at that time and will have zero house payment.

Good luck.

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Old 10-09-2009, 05:32 AM   #20
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People seem to borrow from their homes (heloc, refi's) to invest in the markets and otherwise; I don't know why the reverse (borrowing from your TSP investments to invest in a home) would be materially different if there is no tax hit for using the TSP for a down payment. And then you could refinance/get a heloc on that home and put the money from that back into savings/tsp/general investments.
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