A previous article covered how Baby Boomers are carrying record-high debt into retirement and ways to pay it off before retiring. But, what can you do if your efforts fall short and you end up carrying some consumer debt into retirement? Let’s look at the pros and cons of a few debt relief options.
Tap Into Your TSP To Pay Off High-Interest Credit Cards
Even if you can discipline yourself to never run up credit card balances again, you need to consider that withdrawals from your traditional Thrift Savings Plan (TSP) are subject to income taxes. The TSP withholds 20% to cover taxes on withdrawals from your traditional balance and sends it to the IRS. If you need $10,000 to pay off a credit card, you’ll have to withdraw $12,000 to cover the tax withholding. At the end of the year, that $12,000 is added to your income and it may bump you into a higher tax bracket.
Perhaps that’s why Albert Einstein said, “Compound interest is the eighth wonder of the world.”
If you have a Roth TSP balance, you may be able to make a tax-free withdrawal but you’d still be losing compound interest on the amount you’ve withdrawn. Compound interest means the money in your TSP accrues earnings and those earnings accrue more earnings. Perhaps that’s why Albert Einstein said, “Compound interest is the eighth wonder of the world.” Overall, withdrawing money from your TSP to pay off debt isn’t a good idea.
Tap Into Your Home Equity To Pay Off Consumer Debt
A Home Equity Loan or a Home Equity Line Of Credit (HELOC) may be a good option for paying off consumer debt once you’re retired. Typically, the interest rate is lower than credit cards because both are considered secured loans. However, there are pros and cons to both options along with one huge risk: if you fall behind on payments you can be vulnerable to a foreclosure on your home. Do your research before you take this route.
Tap Into Your TSP Funds To Buy A Fixed Indexed Annuity (FIA)
An FIA is an insurance product that establishes a contract between you and a private sector company that provides you with guaranteed income for life. Your investment is not affected by stock market volatility because the interest it earns is linked to the performance of an outside index such as the S&P 500. Monthly income from an FIA can be used to help cover payments on credit cards and personal loans. You’ll only be taxed on the amount you receive from the FIA while the rest of your investment can grow tax deferred.
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