Use TSP to pay off high interest credit cards?

Do Not Touch Button - shutterstock_119741476Q: Should I use money from my TSP to pay off high inter­est credit cards?

–Joseph, Colum­bus, Ohio

A: I wouldn’t rec­om­mend it.  As a mat­ter of fact, I’d even go as far as to dis­cour­age it.

Real Feel­ings
Don’t get me wrong, I get the issue.  On one hand, hav­ing a bunch of high inter­est rate debt can be a huge strain both finan­cially and emo­tion­ally – and you feel them in the here and now.  On the other hand, money you’ve set aside for retire­ment gen­er­ally can’t be used with­out penal­ties until you’re 59 ½ so it can be really hard to feel all warm and fuzzy about this money you might not get to use for decades.  Put the two together and rob­bing future Peter to pay cur­rent Paul can seem like a great idea.  But it isn’t.

Some Draw­backs
There are a lot of rea­sons why it’s usu­ally a bad idea to raid retire­ment funds for rea­sons other than retire­ment but here are a hand­ful of the big ones:

  • Taxes & Penal­ties – If you take a with­drawal from your TSP prior to age 59 ½, you’ll likely have to pay a 10% IRS penalty for tak­ing an early with­drawal in addi­tion to the taxes you’ll have to pay. The end result could be a loss of as much as 25–30% to taxes. That’s a big cut! And on a related note, this is only an option if your TSP is an old plan for you and not one to which you can make cur­rent contributions.


  • Loss of Growth Poten­tial – Another down­side to using retire­ment funds to elim­i­nate debt is that you lose the growth poten­tial on those funds.  This is true even if you take a loan from an active plan rather than cash­ing out an old one. Lost return com­pared to credit card inter­est rates may not be a big deal over the near term but cal­cu­late it for decades and it can be a huge loss of opportunity.


  • Vio­la­tion of Sanc­tity – Once you step on to the slip­pery slope of using retire­ment money for other pur­poses, it’s all too easy to do it again. And while this might pro­vide some type of short-term relief, it cre­ates the risk that you’ll never be able to quit work­ing because you won’t have any money to sup­port you if you do.


  • Treats the effects, not the cause – I often refer to the idea of using retire­ment funds to pay off debt as putting a ban­dage on a bul­let hole. While it might cover up the bleed­ing, it doesn’t deal with the rea­son the blood is there in the first place. Con­se­quently, it’s likely to con­tinue.  In other words, if you don’t fix the under­ly­ing sit­u­a­tion that caused you to end up in debt, it’s often only a mat­ter of time before you’re sink­ing in it again but this time with no assets left to help get you out.


A Bet­ter (But Slower) Path
So my sug­ges­tion would be to take a dif­fer­ent direc­tion. Rather than focus on your retire­ment funds to get your head back above water, I’d focus on your income and expenses instead. On the income side, find more of it if you can.  Even get a sec­ond job or sell things if you have to.  And on the expense side, find ways to cut them.  Some­times this will be an easy exer­cise but other times it will require some very dif­fi­cult choices.  Either way, the goal is to free up cash that you can use to both build an emer­gency fund and knock down your debt. This approach will cer­tainly take longer than cash­ing out retire­ment funds but it nicely han­dles all of the draw­backs I’ve out­lined above.  Plus, it’ll help you build good habits that can ben­e­fit you for a lifetime.

Thanks so much for your ques­tion.  I hope this helps and I wish you all the best!


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Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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