TSP Hardship Withdrawal Costs Some tough times for Feds during the past month.

Last week the TSP announced that TSP Hardship Withdrawals totaled 8,200 during the 16-day Government Shutdown (versus 5,500  during the same period in 2012).  So far in 2013 the number of TSP Withdrawals adds up to over 104,000 transactions.

Over 8,000 TSP hardship withdrawals in 2 weeks is pretty staggering considering that nobody actually lost income (all Federal Employees were made whole for lost pay and leave following the shutdown).  Paychecks were never forfeited- just delayed.   But I guess a lot of folks are in some pretty dire cash flow conditions, considering that eligibility to make a TSP Hardship Withdrawal requires one of the following:

  • Recurring negative monthly cash flow
  • Medical expenses (including household improvements needed for medical care) that you have not yet paid and that are not covered by insurance
  • Personal casualty loss(es) that you have not yet paid and that are not covered by insurance
  • Legal expenses (such as attorneys’ fees and court costs) that you have not yet paid for separation or divorce from your spouse

Note that  TSP does not audit you for any of these conditions, but highly encourages you to document your financial condition for tax season.

To rub salt in the wound, every dollar you net from a TSP Hardship Withdrawal costs you 57 cents.  I’ll run the numbers below, making the following assumptions on your behalf:

  • Average Federal Salary (2013) is $75,000
    • This puts you in the 25% marginal tax bracket
  • The Average TSP balance (July 2013) is over $100,000
  • The current G Fund Rate is 2.125%.  All of your TSP is in the G Fund.
  • You’re younger than 59 1/2
  • Since you’re already in a financial hardship, you’re not contributing to your TSP (You’ve left free money on the table).
Here’s the rundown of costs for the minimum ($1K) TSP Hardship Withdrawal versus a $10K TSP Hardship Withdrawal.  Note that in each TSP Hardship Withdrawal, you only keep 65 cents after taxes and penalties (see line (2a)):
TSP Hardship Withdrawal Cost
A 57% borrowing rate is pretty steep.  In both cases, the total TSP Hardship Withdrawal costs you about 57 Cents for every $1 you NET when you withdraw.  There’s better ways for you to borrow money to cover a few weeks’ lost pay.

You can download the spreadsheet and plug in your own numbers here.

In short, you need to be prepared for the Next Government Shutdown (January 2014).  If you can’t save up a few week’s pay in preparation for the next shutdown, consider applying for one of the following:

  • Home Equity Line of Credit (~ 3.99% APR at NFCU)
  • Home Equity Loan (~4.24% APR at NFCU)
  • Signature Loan (~12.25% APR at NFCU)
  • A Promotional/New Credit Card with a 0% introductory APR
  • Lending Club loan (< 10%)
  • … or ANYTHING that loans you money at less than a 57% rate.
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