Hi, I'm weighing the 10% penalty

[jazaddict]

I'm looking for information/opinions on these scenarios:
I'm 50. I'm eligible to retire. I have not yet retired.
When I retire I'll have a pension that will cover my expenses including health insurance and COULD cover a mortgage payment.

What's a "better" idea?

1) Pay for a home in full from my TSP, and absorb maximum exposure the 10% penalty?
I like the prospect of no house payment, and maximum disposable income from the pension.


2) Pay for a DownPayment only from the TSP, thus minimizing the exposure to the 10% penatly?
I could diffuse the payment by 72t-ing the balance of the TSP.....but I have a mortgage payment.
I keep access to the cash.
After I'm 55 I could pull the cash out & pay off the house if I want to.

3) I could keep working til I'm 55, but I REALLY don't want to. I actually plan on being the musician that I've put off for the career I"m now eligible to retire from, but in the interest of sheer pessimism I"m not considering the income from this in my calculations (even though I expect some)

 

[REWahoo]

Have you thought about renting?

 

[jazaddict]

Not really....I'm of a mind to take advantage of the reasonable home prices. You'd suggest that because ..... ?

 

[Koolau]

After I'm 55 I could pull the cash out & pay off the house if I want to.

Just a suggestion: Confirm that you can pull penalty-free cash out after 55 having retired prior to 55. IIRC, you may take money penalty free if you retire at 55, but not if you retire at 54 and 364 days and THEN turn 55. I could be wrong. I was once.

re: Renting. If you rent instead of buy, you might not need to take anything from your tax deferred money and then the pre 59 1/2 penalty is moot. Other than that, search the forum (and elsewhere) about rent vs buy argument(s). Each has advantages.

Not an expert on any of this, so YMMV.

 

[REWahoo]

You'd suggest that because ..... ?

You wouldn't need a down payment and would avoid a 10% tax penalty on top of the tax for the lump sum withdrawal. Your post didn't indicate you'd given consideration to anything other than buying and I was pointing out another alternatives.

Of course it varies by location (location, location) and other factors, but housing prices may not appreciate much in the five years between now and 55, when you indicate you'll have other options.

 

[W2R]

I'm looking for information/opinions on these scenarios:
I'm 50. I'm eligible to retire. I have not yet retired.
When I retire I'll have a pension that will cover my expenses including health insurance and COULD cover a mortgage payment.

What's a "better" idea?

1) Pay for a home in full from my TSP, and absorb maximum exposure the 10% penalty?
I like the prospect of no house payment, and maximum disposable income from the pension.


2) Pay for a DownPayment only from the TSP, thus minimizing the exposure to the 10% penatly?
I could diffuse the payment by 72t-ing the balance of the TSP.....but I have a mortgage payment.
I keep access to the cash.
After I'm 55 I could pull the cash out & pay off the house if I want to.

3) I could keep working til I'm 55, but I REALLY don't want to. I actually plan on being the musician that I've put off for the career I"m now eligible to retire from, but in the interest of sheer pessimism I"m not considering the income from this in my calculations (even though I expect some)

My vote is for #3, as much as you REALLY don't want to do it. Either that, or spend less so that you can rent for now. Musicians sometimes travel a lot anyway, so that might work out nicely.

 

[jazaddict]

"...but not if you retire at 54 and 364 days and THEN turn 55."

Yikes. I'll have to research/verify that.

I'm not particularly fond of the renting concept (although I appreciate the outta the box thinking). I mostly wondered what, if anything, was to be gained or cautioned with one or the other of the all or partial exposure to the penalty that I hadn't thought of.

 

[aaronc879]

I just found out(the hard way) that the "10% penalty" is just the Federal penalty. Then, at least in Wisconsin, you have to also pay a State penalty equal to 1/3 of the federal penalty. You should look into that before deciding.

 

[pb4uski]

Any taxable savings or assets other than TSP that could be tapped for a down payment?

Rent to own or seller financing?

Minimal down and 72-t to fund payments until you turn 59 1/2?

Or as others have suggested, rent.

 

[landover]

Is it possible to convert TSP to an IRA, then IRA can be tapped for penalty free down payment for first time home purchase?

 

[clifp]

First you definitely don't want to use the TSP to purchase the house between the state and federal penalties, the amount of withdrawal will put you in a high tax bracket.

Then you should check out and see if you are eligible for any of the low down payment loan options like FHA which require only 3.5-5% down, FNMA also has a program called Homepath.

Next I'd check out doing a partial withdrawal from your TSP to an IRA. Once in the IRA, I believe you are allowed to withdraw up to 10K for house down payments penalty free. (Although you still owe income tax).

I think the biggest problem you will have is qualifying for a low down payment loan while retired. I'd sure suggest doing this while still working.

 

[Buckeye]

Not really....I'm of a mind to take advantage of the reasonable home prices. You'd suggest that because ..... ?

Who knows where your new life might take you? Don't be tied down with a house. Houses may be cheap to buy today but it's very possible you won't be able to sell it without a loss for a very long time.

 

[militaryman]

I would go the 72t route and try to get a mortgage that is an ARM with an ultra low interest rate for the first 5 years (lowering your monthly payment) since you know you will withdraw from retirement savings and payoff after the low interest starts to go up.

 

[jazaddict]

"Next I'd check out doing a partial withdrawal from your TSP to an IRA. Once in the IRA, I believe you are allowed to withdraw up to 10K for house down payments penalty free. (Although you still owe income tax)."

Dang, now THAT sounds pretty spiffy. I have some due diligence ..er..due (response courtesy of the dept of redundancy dept)

Ladies and Gentlemen I thank you for the thoughtful responses. I'll report back when I've executed.

 

[Texas Proud]

I would not do anything that would make me pay a penalty unless there was NO other way... and from what you say, there are other ways...

Also, it is not that many years until you can do what you want without a penalty, so why not wait and save some money...

PS... don't you have savings outside of your retirement accounts? I am surprised when I read that people do not have anything in taxable accounts.. you should have 6 months to a year of money set aside, that should be able to tide you for any shortfall for a few years...

 

[jazaddict]

Incidentally, the 10k exemption is for "First Time" home buyers. The term "First" is a bit squishy. "if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy....." Your considered to be buying a "first home"; well good.
But....
Hmmmm..... In my case, I've been renting out the "main home" to tenants, and paying rent to live in the area where I work.
I found this scenario here: About.com: http://www.irs.gov/newsroom/article/0,,id=204671,00.html

S3. A taxpayer owned her principal residence. Several years ago, she decided to relocate to a rented apartment, but did not sell the former residence. Instead, she rented it out to tenants. Now the taxpayer plans to buy another house and make it her new principal residence. Does she qualify for the first-time homebuyer credit?
A. A taxpayer who owned rental property within the past three years is still eligible for the credit. The taxpayer cannot have owned and used a home as his or her principal residence within the last three years.


So I guess if I push out my retirement until I've amassed 3 years of being a landlord (January of 2014), then I get 10k penalty free.



Thanks again.

 

[jazaddict]

The 10k IRA exemption from penalty (but still taxable income) is for "First Time" homeowners. Those of us renting out our formerly primary home & rent to live are eligible as follows: From the IRS:


S3. A taxpayer owned her principal residence. Several years ago, she decided to relocate to a rented apartment, but did not sell the former residence. Instead, she rented it out to tenants. Now the taxpayer plans to buy another house and make it her new principal residence. Does she qualify for the first-time homebuyer credit?
A. A taxpayer who owned rental property within the past three years is still eligible for the credit. The taxpayer cannot have owned and used a home as his or her principal residence within the last three years.

 

[ATC Guy]

Jaz

I would do option 2. This way you only take a 10% penalty on the down payment. Then 72(t) the mortgage payment for 5 years without penalty. Then at 55, when you can access the remainder of the home cost penalty free, you are clear.

As long as your mortgage interest rate is less than 10%, you will be saving money over that time.

I wouldn't work longer than I had to, such as in option 3. Time > Money as long as you can afford it!

 

[jazaddict]

From a fellow ATC Guy.....amen to punchin asap. ZAB til 09, now HQ.

BTW....I'm thinkin that Koolau is right....unless ATC is different, the access at 55 requires you punch at (or after) 55. Out before 55 & you're waitin til 59.5 for penalty free access.

72-T seems to be a commitment til 59.5 also.

I'm thinkin about rollin' some to an IRA where I can access it, 72t the balance.

 

[Free To Canoe]

I just found out(the hard way) that the "10% penalty" is just the Federal penalty. Then, at least in Wisconsin, you have to also pay a State penalty equal to 1/3 of the federal penalty. You should look into that before deciding.

There is the penalty. Then there is Fed, State and local income tax on said amount here in PA.

 

[BigMoneyJim]

I just woke up from a nap, so perhaps I'm reading wrong, but your mention of the 10% penalty sounds misunderstood.

First, my understanding that any withdrawal from TSP (besides a qualified rollover to a traditional IRA) is taxed (federally) as income and will affect your tax bracket if you pass the next threshold. I think it is also taxed as income at the state level, but I'm not sure.

It is the 10% penalty for early withdrawal that may be waived for "first time" home purchase; the withdrawal is still taxed as income.

As you already seem to know, the TSP (and a 401(k)) has conditions for early withdrawals starting at age 55, and an IRA has the 72t exemption for withdrawals before 59.5. The rules have changed since I last looked at them closely, but I don't recall a lump sum withdrawal being feasible. Plus, it is taxed as income.

I'm vaguely wondering if there might be a trick with rolling some funds into a Roth IRA and then using the principal for a down payment or purchase, but there is still income tax on the amount converted to Roth IRA at the time of conversion.

 

[martyb]

Small correction...you don't have to actually be 55 to withdraw from the TSP penalty-free, you just have to retire sometime in the same year that you turn 55, and you can make the withdrawal. Meaning...you could be 54, and retire in January, but your 55th birthday isn't until December of that same year, and you're still in the clear with regards to the penalty. That's the way it works. Believe me, I've been studying up on this stuff, since I'm CSRS and have been maxing my TSP for a few years now. At one time, I was also thinking of using my TSP to pay cash for a house after retirement, but after doing a lot of research, I've revised that plan substantially. I might be more likely to pay off my house in increments over a few years, possibly 5 or so, by taking only enough from my TSP each year to get me to just under the next higher tax bracket, but no more. That means being careful about setting up the next year's monthly withdrawals with the tax brackets in mind. Just how I'm looking at it right now...there could be a few more tweaks to the plan before it actually is kicked off. I can retire in about 10 months.

 

[Animorph]

Unless your TSP is way more than you need to retire already, this sounds like a good way to blow through it early and have to go back to w*rk. No current house to sell? Are you renting now? At best you're over paying for the house by 10%.

I'd save outside the TSP for a downpayment and get a mortgage if I really had to.

 

[martyb]

Unless your TSP is way more than you need to retire already, this sounds like a good way to blow through it early and have to go back to w*rk. No current house to sell? Are you renting now? At best you're over paying for the house by 10%.

I'd save outside the TSP for a downpayment and get a mortgage if I really had to.

I'm assuming you're talking to the OP here, not me. My TSP is in addition to my 2 pensions and other funds, wife's 401k, IRAs, etc.

 

[jazaddict]

Fellas,
You've all been great. I appreciate all the input.

Short story, I'm headin' out ASAP. I'm prolly gonna roll into an IRA with a portion of the TSP so I can be flexible. Gonna pull as little as I can early & endure the 10% to get a mortgage & 72T as much of the payment as I can. The 0% Florida state income tax will make this acceptable.


I AM gonna work....by choice....as the musician I've worked to become while sloggin the 9to5....and I'm gonna love it.

I'll be debt free, and I'll have enough to live comfortably with my wife.
I haven't "pulled the trigger" on this plan, so if I learn things or choose to work longer, I still can. But 2 things are pushin me....

1)All of my peers, all of the people I've heard of who's situations roughly equate to mine have NEVER regretted retirement.

2)Several people I know have family members or aquantences who've died after only a short period of retirement. I'm of a mind to maximize the balance of my life dedicated to retirement.