Advice Needed

[jbirdway]

Hello Community,

Looking for some good financial advice from some of you more "seasoned" and financially savvy folks out there.

A coworker friend of mine had a string of bad luck over the past several months and took some big financial hits. First she exhausted her bank savings account, and then had to end up maxing out her credit card to 20 K. However, she's always been good about funding her traditional TSP account, contributing the max amount each year, and she now has a nice balance of 300 K. She is a GS-11, and plans to retire in 3 years when she reaches her MRA. So she asked me if borrowing from her TSP account to pay off her 20 K credit card debt would be a good idea since the interest rate is 13%, and the high balance is really haunting her. I advised her that borrowing from her TSP is never a good idea, and that I wouldn't recommend it if at all possible. I suggested instead that she lower her TSP contributions to only 5%, and take the extra money to apply toward her credit card each month until it's paid off, or way down at least. She's anxious to get out from underneath the credit card debt in a hurry, and doesn't like the idea of lowering her TSP contributions. But I say she'd be hurting herself even more in the long run by taking out the TSP loan. Who's right?

I'd like to get some other opinions on this matter. I think I'm right and would like some more ammo to support my plan, but welcome any advice. Appreciate you taking time to respond.

J

[ravnrob2]

if she has had some"big finanacial hits", then taking out a loan and maxing out thrift at the same time seems impossible. decrease to 5% so that you still get the matching...take the $500 plus dollars that you just saved per pay period and apply to credit card. that's (500 X 40 pay periods=20000)...$20000 paid back on credit card in a year and a half....or take the loan(which I don't suggest you do) miss out on the gains, card paid off in full but remember you must pay back within the 3 years that you want to retire or it will be considered income and then you will have to pay taxes on the remainder of the loan.

[TSPBuilder]

Home equity loan is usually a good way to resolve this if it exists.

[evilanne]

I don't know if there is a right or wrong answer and we really don't have a complete picture of her situation. See http://www.tspallocation.com/tsp-loan-guide/ is 3 part series, part 2 provides pros & cons related to TSP loans.

$20K @ 2.25% for 3 years = payments of about $575/month. Can she afford to pay back the loan in 3 years without reducing her contributions? If not paid off by the time she retires it will be a distribution taxed as ordinary income and may be subject to 10% penalty for early withdrawal. If she doesn't have the money to pay it off, she could always choose to work until it is paid off to avoid any penalty. What will she do if she faces additional financial challenges? You can only have one TSP loan at a time. Does she have any other assets that can be liquidated to pay part or all of the credit card debt? Any other alternative to get low cost loan or transfer balance to low rate credit card (promotional rates usually only last a year)?

[crondanet5]

I never met a federal employee who did not dream of an early retirement. Perhaps her smartest move is to put off retirement plans, use strict budgeting and pay off her credit card fast as she can. Then I would suggest she continue working until she has a $100,000 in the bank and possibly be eligible for Social Security Benefit. That would give her good monthly income and a cash reserve to cover the next financial tumble while leaving her TSP Account to continue to grow tax deferred until she reaches age 70 1/2 and must begin Minimum Required Withdrawals.

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Not a financial advisor. Just have my clear-headed moments.

[kdfwr310]

If the debt is bothering her that bad, she should stop all investments until the debt is paid. It's hard to get rich when you have debt/interest to pay over a long term.

[mindofmush]

evilanne and ravnrob2 have the best advice.

Also consider looking at her existing returns; if she is parked in the G fund or a low return L fund, she should consider researching a seasonal to make up for lower contributions while paying off the credit card debt.