The prospect of enjoying a mortgage-free retirement while aging in place is undeniably appealing, especially when housing expenses can consume 30% or more of your income as a retiree. However, using your Thrift Savings Plan (TSP) to eliminate your mortgage might not be the best strategy when you consider all the factors involved.
Evaluate Your Current Mortgage Details
First, contact your lender to determine the payoff amount for your mortgage. This figure is crucial when calculating the taxes on your traditional TSP withdrawal.
Next, assess how many years remain on your mortgage. If you’re nearing the end of your loan term, using your TSP to pay it off might not be sensible.
Lastly, consider the ongoing costs you’ll still face even after paying off your mortgage, such as homeowners insurance, property taxes, HOA fees, maintenance, and repairs. These expenses won’t disappear just because you’ve paid off your home.
Tax Implications of Using Your TSP
Since contributions to your traditional TSP are tax-deferred, withdrawals are taxed as regular income at your current rate. The TSP mandates a 20% withholding for taxes on traditional balance withdrawals, meaning you’ll need to withdraw more than the mortgage payoff amount to cover the tax liability.
Moreover, the actual tax owed may exceed 20%, depending on the withdrawal amount, potentially pushing you into a higher tax bracket due to the increased income.
“The TSP mandates a 20% withholding for taxes on traditional balance withdrawals, meaning you’ll need to withdraw more than the mortgage payoff amount to cover the tax liability.”
An Alternative: Fixed Indexed Annuity (FIA)
Instead of using your TSP to pay off your mortgage, consider investing in a Fixed Indexed Annuity (FIA). An FIA is an insurance product that provides guaranteed lifetime income, with interest rates linked to an external index like the S&P 500. This investment shields you from stock market volatility and can provide immediate income to cover mortgage payments.
Even better, you’ll only be taxed on the income you receive from the FIA annually, allowing the rest of your investment to grow tax-deferred.
Connect with an FRC® trained advisor to explore your options and make an informed decision.
