4.4.25: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.
Speaker1:
Welcome back to the Federal Retirement Show. I am your host, Val Majewski with American Benefits Exchange. As always, really appreciate you taking the time out of your busy schedule to join us to learn about your benefits and retirement information. I commend you for doing it because these are things that we believe you need to know. You need to know all the information possible so you can make the best decisions as you go through your working career and prepare for retirement. Now there's a lot of things going on out there, right? I've gotten emails, phone calls, messages, uh, from federal employees, just like you, wondering what the heck is going on because there are new avenues, new things that are going on every day when it comes to the government efficiency, when it comes to, you know, fear of being ripped, a reduction in force, or should I take the early out that might offer my my agency just offered, you know, I took the deferred resignation, the fork in the road, You know what are my next steps? I've heard a lot of different questions, comments, fears, worries, doubts, things like that. And one of those, and as you've seen in our recent episodes, we were going back to the basics, going back to the beginning so people can see what it's like to be a part of the first system and Phegley and PSP and all of those things. But occasionally we will be answering questions from you, the federal employees out there that are listening.
Speaker1:
And by the way, I really do appreciate those that have been diligent listeners and watchers of the show. It is so great when I see you at events, when I see people, when I'm giving a training and people come up and say, hey, I've been I've been an avid listener of the show. I watched your recent recent episode. It's really helpful. It was beneficial. You know, this is, uh, awesome when I see this. That's what we did this show for. That's why we started this, because we wanted to get this information in your hands and have it be a positive thing, a positive impact for you. So I thought that was a side note, but thank you so much to those that are avid listeners, do me a favor if you like what we're doing. You like this kind. Share it with your friends. Tell others about the podcast. Because the more federal employees that can hear this information, view the many episodes that we have recorded for you the better. Because that way, again, we know that more federal employees are going to make the right decisions when it comes to their career. And like I said earlier, as you move closer and closer towards your goal of retirement, of having a happy retirement, put it that way. So today comes from a situation from a federal employee that was dealing with or is dealing with, hey, I'm going to be leaving service soon because I either took the Vera, I took the fork in the road.
Speaker1:
I'm getting rift. You know, this is my situation and many of you could relate to this, but if you're going to be leaving service and you have an active TSP loan, what are your options? Now there's not many of them. So we're not going to spend a ton of time on it. But you might have the same question. Look, I've got an active TSP loan and I'm going to be retiring because I took the Vera. I'm going to be retiring at the end of September because I took the fork in the road, the deferred resignation. I just found out that my position is being eliminated and I'm being riffed. I have an active TSB loan. What do I do? What are my options? And we'll keep it very simple. And if you have further questions, you got to reach out to us. You got to go to our website. Fill out the form, one of our experts across the country. If it's not me personally, we'll be reaching out to you to discuss your particular situation and answer your questions in finer detail. So we're going to talk about basics today. And it's pretty simple. But what if you separate from service with an active TSB loan. So let's dive into today's content. So you really have three choices. There's one of three things that you can do if you retire or separate from service with a TSB loan.
Speaker1:
The first thing fairly simple, right? You've got a loan. This was money that you borrowed. This was not money that you withdrew. This is money you borrowed. You have not paid tax on this money when you borrowed it from TSB. And just so you know, you can only borrow TSB or TSB money or loan money out while you're an active federal employee. So you cannot do so while you're or when you are separated from service. But if you separate with an active loan, you have one of three choices. The first one is to just repay the loan. Pretty plain and simple. You owe money, you borrowed money, you separate. You can't have a loan anymore when you separate or you can't get new loans. So what do you have to do? You can pay it back in full. Not a problem. You pay yourself back, plus any interest that's owed on their lump sum. Now typically when you do take a loan though, how does a loan repayment work? Well, it depends upon the type of loan that you took out. And and generally most loans that I see are called general purpose loans. General purpose loans. So from your TSB you're allowed to. It's a general purpose loan or a residential loan that you can take from TSB. What's the difference? General purpose loan means that you can take money for whatever reason just because you want it.
Speaker1:
That's it. And you're only able to loan out money that you have, um, from TSB plus any earnings that you earn. But you can loan it out for whatever reason you want, provide no documentation, but you have to repay that within a certain period of time. And that repayment term is 1 to 5 years. Right. Or you have up to five years in order to pay it back. The residential loan is only for the purchase or construction of a primary residence. It's not for the beach house, the Airbnb, the investment property. This requires a lot of documentation and now your repayment can go up to 15 years. Right. So general purpose you have up to five years. A residential loan up to 15 years. And I mentioned the first thing that you can do is not worry about repayments and just pay it off. If you separate from service, pay it off in full, whatever balance is left of your loan. Separate from service, you can pay it back in full. Number two is you can set up installment payments. Now you can't get more money, right? You're not going to loan out more money, but you can continue your current payments or set up installment payments to finish up your loan and pay it back. And it has to be paid back based on the original term, which means if you had a general purpose loan, you have up to five years to pay it back and you're in year four and now you separate service.
Speaker1:
You only have one more year of the five left, so you have one more year in which you can pay it back. Right? With those installment payments, you just continue it on the original term. So the two things that you can do, if you want to pay it back, you can pay it back in full lump sum. What can that do for you? Well, it can eliminate some of the interest that you have to pay on it. That can be a benefit of it if you've got the money to pay it back. Or you can continue those installment payments until it's paid off based on the the term of the original loan. Right? If it's a five year term because of the general purpose or 15 because of residential. The last thing, and this is what I typically see people do, doesn't mean that you have to do it, but this happens more often than not. People are saying, well, I don't want to have to repay it. I've already got the money. So just let's do this. We're going to take a taxable distribution for the remaining balance. Right. Because when you loan money out from your TSB you don't pay tax on it. It's a loan because the purpose of the loan is to get some money and then you're going to repay it back over time and you're going to pay that off. And now you have more money that you can loan in the future if needed.
Speaker1:
But you don't pay tax on the money that's loaned out. So if there's an outstanding loan balance at the time of separation, what you can do is that you could use options 1 or 2 and repay the loan in some way, shape or form, lump sum or installment payments. Or you can say, you know what? Um, I don't want to pay the rest of it back. I'm just going to take a taxable distribution, and you're going to get a 1099 at the end of the year for the remaining balance, and you're going to owe tax on the remaining portion of it. So just be prepared for that, because if it's a significant amount and you're thinking, well, I'm in a certain tax bracket now, I'm going to get this tax bill at the end. Maybe I do want to continue the installment payments, but if you're like, nah, it's okay, I'm just going to keep the money. I'll set a set enough aside. If there's still loan money left over, um, to then just take that taxable distribution, I'll pay the tax on the remaining balance amount. So those are the three things that you can do if you have an outstanding loan at the time of separation. And I'll just say it one more time. It's pay back in full. Continue the installment payments or take a taxable distribution. Don't pay anything back and just take a taxable distribution on the remaining balance.
Speaker1:
Um, which one's right for you? It depends on your situation, depends on a number of things, but will depend on your specific situation. I can't give a blanket statement of what I think is best. I just can say I typically, typically will see federal employees take a taxable distribution to avoid having to make repayments back to this loan. They're like that. I'm separated. Just just give me the taxable distribution. Now if you have other questions about this? If your situation is unique, I mentioned, go to our website, Federal Retirement Show.com fill out the form. We'll be in touch and we can have a specific situation, discussion about your entire scenario and answer all of your questions, not just those around TSP or a TSP loan. Again, I really thank you for taking the time out of your schedule for joining us and being a viewer of our content. If you have not done so, go back and view the 100 plus episodes that we already have in store at the website or wherever you watch. Podcasts could be on on YouTube, Spotify, SoundCloud, Apple Podcasts. We're there, and don't forget to subscribe! Get notified when a new episode comes out, because we come out on a weekly basis with new content for you, the federal employee that's looking for accurate and honest information regarding their benefits and retirement situation. Thanks again for joining us and look forward to seeing you on a future episode.
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