While the government is not laying off military workers, the global elite isn't immune from the financial effects of the current pandemic. Many in the military may have the need for additional cash to help get them through this time period.
The CARES Act creates temporary special rules that change the impacts of loans and withdrawals from retirement plans, including the Thrift Savings Plan (TSP). Even though the CARES Act changed the rules for withdrawals and loans at a high level, not all plans have adopted the new rules. Each retirement plan is run differently creating a confusing environment for participants. On May 15th, TSP has issued guidance about what is specifically available for TSP participants. Here’s what you need to know.
Who Qualifies for These Provisions?
Before we get to the changes to the loan and withdrawal rules, you need to know if you qualify for them in the first place. If you meet one of the following criteria, you are considered a qualified individual:
- You have been diagnosed with SARS-CoV-2 or with the coronavirus disease 2019 COVID-19 by a test approved by the Centers of Disease Control and Prevention.
- Your spouse or dependent has been diagnosed with such virus or disease by such a test.
- You are experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors determined by the Secretary of the Treasury.
TSP- Coronavirus Loan Relief
While the TSP normally allows for loans up to $50,000, under the CARES Act, qualifying individuals can take a loan up to the smaller of $100,000 or 100% of their account balance. In addition to the increased dollar amounts available from your TSP, you can also temporarily suspend your loan payments for 12 months, which will automatically extend your loan term for the same time period. The temporary suspension not only applies to new loans but can even be applied to existing loans.
TSP loans are relatively easy to access. The current interest rate is 0.75% which is much cheaper than personal loan interest rates. With the ease of applying and low costs TSP loans can seem attractive; however, be sure to also consider the downside. The funds you borrow will no longer be invested for potential growth and interest. While contributions are payroll deducted, loan repayments are paid with after-tax dollars and those same dollars will end up being taxed again when you ultimately withdraw the funds.
There are a few dates to keep in mind regarding the new loan rules. The exact deadline for applying for these loans has not yet been determined, but as of now, it is expected to be sometime in September of 2020. The deadline to request a suspension of payments on a new or existing loan is December 31, 2020.
TSP- Coronavirus Withdrawal Relief
CARES Act has also made changes to allow for withdrawal relief. Qualified individuals can designate a withdrawal as a coronavirus-related distribution when they file their taxes. This provides three potentially favorable tax changes on the lower of $100,000 or the full value of your TSP account. You will need to designate your withdrawal as a corona virus-related distribution when you file your taxes for 2020.
First, the normal 10% withdrawal penalty for distributions if you are under 59.5 is waived. Second, while you still will pay ordinary income tax on a withdrawal, you can spread the tax payment over a three-year period of time instead of paying the entire tax cost in the year of the withdrawal. Finally, you are able to repay all or any portion of your withdrawal within that three-year time period and avoid taxation on any amount you replace, essentially treating your withdrawal as a loan.
Should you take a loan or withdrawal from your TSP?
Just because you can take a loan or withdrawal does not mean that you should. Unfortunately, there is no “right” decision for everyone. What is right for you largely depends upon your personal financial situation. As with most financial questions, knowing your situation and options is a great place to start.
Conventional wisdom says that retirement assets should only be tapped when you are up a creek with no paddle. With annual limitations on how much you can deposit into a retirement plan, accumulating large balances takes discipline and time. Pulling money out quickly undermines those efforts. Couple that with the current conditions, selling investments to take money out through a loan or a withdrawal now while the market is down, can have a big impact on your longer-term goals. This strategy does not allow the money the potential to recover its losses and may mean that you have to work a few years longer, or that you need to save more in the future.
Before you make the decision to withdraw money or take out a loan from your TSP make sure that you have examined all your alternatives. Here are some things you should consider:
- Utilize government help- both local and federal governments have provided cash vehicles to help families in need. The most well-known are the stimulus checks and unemployment benefits.
- Visit your service relief organization- relief organizations provide emergency financial help with interest-free loans, grants, or a combination of both.
- Call your banking and financial institutions- during the current pandemic many institutions are willing to adjust your loan terms and make exceptions. This applies to some landlords too.
- Aggressively cut expenses.
- Look for other sources of income- temporary employment and or low-cost lines of credit can provide cash flow.
If you have exhausted all of your options, The CARES Act has made it easier and reduced the burden for qualified individuals to tap into your TSP. Before pulling money out, verify that you are a qualified individual and then consider the new options and the differences between loans and withdrawals.
The CARES Act is still new and retirement account custodians, including the TSP are scrambling to make adjustments to accommodate the updates. According to the TSP website, they expect the loan options will be available no later than June 22, 2020, and that the withdrawal option will be available in mid-July 2020. Updates and forms will be available on their website.
The TSP loan and withdrawal options may be the same for every participant, but each person has a unique situation. If you need help navigating which options make sense for you, we can help. Contact us at 904-374-9098 or email@example.com.
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