Cashing out 401K/TSP

[HomesteadDreamer]

My wife and I have Cola'd military retirements and cheap medical coverage. Overall, we could probably retire early if we didn't have a mortgage. I am very tired of working and am ready to retire to a more simple lifestyle. We are only 48, so we have several years left before we could access our TSP penalty free. I have been thinking about cashing out about $200k, combined with some other savings to buy a home with cash so that we no longer have a mortgage and can retire. I realize that I will only end up with about $130k of that withdrawal, but honestly at this point I am willing to take that hit.

I'm sure almost everyone would argue against it, but wanted to see if anyone else has done this or if there are other options available.

 

[njhowie]

I can appreciate the temptation to take a large distribution and do what you contemplate. However, there may still be a better way to do it and not get hit for 10% early withdrawal penalty. Obviously you will pay taxes on everything you withdraw, but we can avoid the additional 10% penalty for withdrawal prior to age 59 1/2.

When you leave your job, have one of the big name brokerages or mutual fund houses do a trustee-to-trustee rollover for you into an IRA. This is the first thing to do - take all your money with you when you leave. It should be a trustee-to-trustee rollover so you don't get caught in any unexpected tax situations - which can happen if they issue a check directly to you and something goes wrong.

Now, once that is done, have the new firm set up a 72t distribution plan for you - which allows you to take equal annual (could probably even be set up as monthly) distributions up to age 59 1/2 penalty free. So, buy your new house, make the down payment, and then get a 10-year mortgage using the 72t distributions to make the payments. Yes, in this model you will be paying the interest on the mortgage. However, the interest rate will certainly be significantly less than 10% penalty rate, and that interest being paid will be tax deductible - so you are making out much better than if you would have taken the large initial distribution paying the additional 10% penalty.

Google for "rule 72t" for more info.

 

[samclem]

njhowie's plan would save you a lot of money, but you'll need to do the math and find out if the amount you can get as a 48 year old under the 72T amortization provisions will be enough to make your loan payments (and, there'd be nothing wrong with getting a longer term on the mortgage to reduce the size of the payments needed. But I'd be sure to get a fixed-rate mortgage at this point). You might need to pitch in some money from your after-tax accounts to make the payments.

Do you have any money in Roth accounts? Your contributions to those can be taken out at any time.

 

[RunningBum]

Find another way. You are cash poor (until 59.5), yet you want to take away your mortgage, which is the easiest way to leverage cash? And at the price of a 10% penalty plus a large income tax on the withdrawal? This sounds like a really bad idea.

The previous posts have probably the best ideas. If those don't work, how about taking out a second mortgage or HELOC on the house, and set aside that money to make mortgage payments for the next 10 years? Or refinance for another 30 years to better stretch out the money, and refinance in full and use the extra money for the payments. How much of is left on the mortgage, how many years, what's the rate, and what is your current payment? And how much is the house worth?

If taking from your 401K is the only choice, then I'd only take enough each year to make mortgage payments for that year. Still a bad idea but not as bad as taking the full amount out now.

 

[Red Badger]

Another option (while employing above strategies) is to consider trimming costs by buying a house in need of TLC (if you are handyman type), or a very, very modest home with a lower price. Then, once TSP is routinely available, upgrade as desired.

In any case, find a way to pull it off. I started flaming out around 57 and retired at 60. Now, I wake up and think I'm still sleeping and dreaming. Life is too short to be miserable.

 

[Sunset]

OP others have given you good suggestions.

But your original idea to simply lose the 10% AND pay the higher taxes is not a good idea, you could possibly run out of money in 8 years and be forced to go back to work at some menial job.

Work is called Work because it's not normally fun, otherwise it would be called Vacation.

 

[jollystomper]

IMHO, don't do it. Keep your retirement funds separate from paying off your mortgage. Better to look for a 2nd part-time job and put those funds towards paying down the mortgage.

 

[pb4uski]

I read the OP and would have suggested njhowie's plan... well done.... much better approach that a lump sum withdrawal that puts you in a sky-high tax bracket for one year.... take advantage of progressivity.

 

[Mdlerth]

Stop! Read instructions before proceeding!

I'm sure almost everyone would argue against it...

That would include me. I just finished a reply on another thread where I advised the OP to consider tax-deferred money off-limits.

Before you get too comfortable with the prospect of a heavy tax hit, how about you mosey over to the Blow That Dough thread to get ideas on what you could really do with 70 large which you might enjoy more than feeding it to the government?

http://www.early-retirement.org/for...h-2018-a-90646.html?highlight=blow+that+dough

 

[RunningBum]

I missed that the OP was looking to buy a new home, rather than deciding to pay off the mortgage, but it doesn't change the overall strategy to use a mortgage to better leverage the money. njhowie's plan is the best though I probably would do longer than a 10 year mortgage. It depends on how much you can take yearly in a 72t, but my thought is to leverage the money for 30 years since rates are still pretty low, and spread the taxable distribution of the TSP/IRA over many years.

 

[njhowie]

I missed that the OP was looking to buy a new home, rather than deciding to pay off the mortgage, but it doesn't change the overall strategy to use a mortgage to better leverage the money. njhowie's plan is the best though I probably would do longer than a 10 year mortgage. It depends on how much you can take yearly in a 72t, but my thought is to leverage the money for 30 years since rates are still pretty low, and spread the taxable distribution of the TSP/IRA over many years.

Sure. I was simply providing an alternative that would produce as close to the equivalent of the lump sum now to own the new house outright without mortgage...yet avoid the 10% early withdrawal penalty. Whether the funds are withdrawn now or in the future, obviously regular taxes will be paid on it.

The 72t goes to age 59 1/2, so in my approach, the objective was to match the mortgage to the time on the 72t, owning the house mortgage free at 59 1/2.

There is no limit to how much you can take through a 72t election - the yearly amounts withdrawn simply have to be (substantially) equal through age 59 1/2. If he was going to take $200k as mentioned, it would just be $20k/year.

Although you may get longer term financial benefits in hanging on to a cheap mortgage, the freedom of being mortgage/debt free is "priceless".

 

[samclem]

There is no limit to how much you can take through a 72t election - the yearly amounts withdrawn simply have to be (substantially) equal through age 59 1/2. If he was going to take $200k as mentioned, it would just be $20k/year.

I think this is not accurate. The max allowable 72t amount is a function of the individual's (and possibly beneficiary's) age (i.e. expected actuarial remaining lifespan), when they start. There are three ways of computing it that are acceptable to the IRS, but they are all based on this basic idea.

The OP could withdraw, under the most aggressive calculation method, about 4.7% per year. This is one reason that a 30 year mortgage might be useful, to get the payments down.

More from the IRS here.
Calculator here.

 

[joeea]

I have been thinking about cashing out about $200k, combined with some other savings to buy a home with cash so that we no longer have a mortgage and can retire. I realize that I will only end up with about $130k of that withdrawal, but honestly at this point I am willing to take that hit.

Seems like an odd way to throw away $70k.

Maybe you could purchase a smaller home? Or rent?

 

[njhowie]

I think this is not accurate.

Thanks for that - I was incorrect.

 

[mikelish]

How to Access Retirement Funds Early

https://www.madfientist.com/how-to-access-retirement-funds-early/

 

[Newventurer]

Under new tax guidelines would you still have enough in deductions to gain the benefit of mortgage interest or will you be taking the standard?

 

[Nords]

My wife and I have Cola'd military retirements and cheap medical coverage. Overall, we could probably retire early if we didn't have a mortgage. I am very tired of working and am ready to retire to a more simple lifestyle. We are only 48, so we have several years left before we could access our TSP penalty free. I have been thinking about cashing out about $200k, combined with some other savings to buy a home with cash so that we no longer have a mortgage and can retire. I realize that I will only end up with about $130k of that withdrawal, but honestly at this point I am willing to take that hit.

I'm sure almost everyone would argue against it, but wanted to see if anyone else has done this or if there are other options available.

Homestead, here's a list of all the ways you can tap your TSPs before age 59.5. All of them are penalty-free, and most of them are tax free.
http://the-military-guide.com/early-withdrawals-from-your-tsp-and-ira-after-the-military/

I'm not sure why you're planning to buy a home (and a mortgage). Could you continue to rent for a while? Once you start your full retirement then you might want to use your military Space A travel benefits instead of spending your time taking care of a home.

One way to look at it: when you rent your home then your payment is never higher than your rent. When you own your home then your payment is never lower than your mortgage.

If you're set on acquiring a home then... as others have mentioned, you can withdraw contributions to your Roth IRAs at any time for any reason, penalty-free and tax-free. You can also withdraw some funds from your Roth IRAs for a first-time home purchase.

You could buy the home with the cash from your savings (for a down payment) and use your VA loan eligibility for the rest. If either of you have a VA disability rating then you could waive the VA's origination fee. You could also start accelerating payments on the mortgage from your other savings.

If you apply for a 30-year fixed-rate mortgage, its principal & interest payments remain fixed for 30 years. Meanwhile your two military pensions are rising every year by the cost-of-living adjustment, and you could use some of that extra money to accelerate the mortgage payoff. You're essentially borrowing money (the VA loan) at a fixed rate, and the loan payments are backed by one of the world's best inflation-adjusted life annuities.

In your situation, I'd use the Mad FIentist post (linked above) to do a rollover of your TSP accounts to their equivalent IRA accounts. If you have Roth TSPs then you can roll them over to Roth IRAs, wait five tax years, and withdraw the amount that you rolled over. You can also roll your traditional TSPs over to to traditional IRAs and then start converting them to Roth IRAs (as per the Mad FIentist thread).

Finally, if either of you have tax-free contributions to your TSPs from tax-exempt pay during a deployment to a combat/support zone, then as you roll the TSPs over to your IRAs you can withdraw the tax-exempt contributions right now-- free of penalty and (of course) free of tax.

 

[l8_apex]

It also seems like a strange time to be buying a home when considering the 'macro' situation: i.e. we're much closer to the multi-year peak in home prices than we are to the trough.

What's your current mortgage payment? How many more years of that? How about a strategy to handle those payments but retire now? (take in a tenant, refi to reduce monthly payment amount, rent out home and rent a smaller place for now...)

 

[cbo111]

If you have TSP funds that were earned in a combat zone (taxfree) and you decide to roll the account to a brokerage house, make sure it is handled correctly. When I rolled to Vanguard a few years back, things got screwed up. I could never figure out who screwed up, but in the end the taxfree combat pay could not be transferred to Vanguard IRA. So TSP wrote me a check for the ~15K taxfree amount. No big deal in the end.