January 15, 2019
I have to say I never thought that I would be doing an alert about how federal employees who have solid, good-paying jobs would have to find funds to simply pay their everyday bills because of the government shutdown.
Here are just a few things you might need to consider to help you get by until things go back to normal.
First, please note that because you are a federal employee, you might have a retirement account similar to a 401k known as a Thrift Savings Plan or TSP. Your spouse, however, may have a 401k or 403b. So throughout this article, I will be referring to all those accounts in case it is your spouse’s non-federal employee account that you may have to access as well.
LOANS FROM YOUR THRIFT SAVINGS PLAN—401k-403b
Most of you have a TSP 401k, etc. The maximum loan amount is 50% of your vested account balance up to a maximum of $50,000.
Now this will be the first time in a long, long time that I am telling anybody to even consider this, and here is why: If you don't have the money to pay your bills—if you don’t have any way to feed your children, pay your rent, keep the electricity on, etc.—then you might want to consider the strategy of taking a loan from your Thrift Savings Plan account. (You cannot take loans from IRAs.)
If you can take a loan from your Thrift Savings Plan account and you do so, when you finally receive your back pay, you will then hopefully have enough to pay back your 401k loan. Ask your HR rep about this.
Before however you touch one penny in any retirement account see below about using credit cards first.
I have always said Roth IRAs are my favorite retirement accounts of all—this is why: If you have a Roth IRA, you can withdraw any amount of the money you originally put in without taxes or penalties whatsoever, regardless of your age or how long that money has been in there.
Over the years, you have put $15,000 in a Roth IRA. That money has grown to be $25,000. You can withdraw any amount up to the $15,000 you originally put in with no taxes or penalties regardless of your age. It’s the $10,000 of growth that you cannot touch till you are 59.5 years of age, without owing a 10% penalty and income tax.
So, Roth IRAs could be one of the first places you look after maxing out your credit cards to get serious emergency money if you are totally broke because of this government shutdown.
TRADITIONAL IRAs OR IRA ROLLOVERS
If you have a Traditional IRA or an IRA rollover, you can withdraw money that’s in those accounts and not pay taxes or a 10% federal tax penalty if you are under 59.5 if you put the money back into that IRA within 60 days. If you are one day late you will owe taxes on any amount you did not pay back and a 10% federal tax penalty if you are not 59.5 or older.
Obviously if you are 59.5 or older, you can make withdrawals from your IRA or IRA rollover without penalties—but you will owe ordinary income taxes on the amount you withdraw unless your IRA is a Roth account.
IRS RULE OF 55
For those of you who are planning to exit your job with the federal government—or any job for that matter—you need to understand the Rule of 55 by the IRS. Pay attention.
Here’s the scoop: If you are going to be 55 or older in the year you leave your job, or were fired, you can withdraw any money that is in your TSP 401k or 403b without any penalties whatsoever. If it’s a traditional TSP 401k or 403b you will owe taxes on whatever amount you withdraw.
Here’s an example:
You are currently 54 and you will turn 55 on Dec 31, 2019. You have money in your TSP plan. You quit your job in February of 2019 as a Federal Employee and you want to get another job. While you are looking for a new job, you become desperate for money. You can take money out of your TSP without the 10% federal tax penalty, even though you are only 54 when you make the withdrawal. Why? Because you will be turning 55 in 2019. Again, the Rule 55 says you can withdraw any money you want from your TSP 401k or 403b without having to pay that 10% federal tax penalty if you left service in the year that you are going to turn 55 or older.
Please note: If you take any money that’s in your TSP 401k or your 403b and you do an IRA rollover with it - the Rule of 55 does not apply. Remember any money in your Traditional IRA or IRA Rollover cannot be touched in any way that you want until you are 59.5 years of age or older in most cases. That’s why I love Roth IRAs.
STAY AWAY FROM PAYDAY LOANS
Do not under any circumstances (please, I’m begging you) take out a payday loan. Please don’t do it—if you do, it will be the biggest mistake you have ever made. The interest rates are insane. And the way payday loans are structured, you won’t be able to claim them if you have to file for bankruptcy.
CREDIT CARDS—USE THEM WISELY, DO NOT TAKE CASH ADVANCES
Hopefully you have credit cards that have available credit on them. Use the credit cards that have the lowest interest rates on them first. Do not take cash advances. Simply use your cards to buy everything that you need during this time of government shutdown. Use them for buying gas, buying food at a grocery store, paying your phone and electric bills, etc. I know you’re going to be running up your debt on the credit cards, but I’d rather you do that than even taking a loan from your TSP.
Never forget that money in your retirement accounts—especially a TSP 401k or 403b—are protected against bankruptcy.
When the government reopens and your back paychecks are paid to you and your money starts to flow again, you can pay off the credit cards in full.
Warning: Do not be tempted once your pay resumes to send in only the minimum payment due on the credit cards. Get rid of the credit card debt you ran up as fast as possible.
This probably should have been the very first thing that I told you. You have to call all your creditors and you have to tell them you’re a federal employee and you’re not getting a paycheck and, therefore, can you please have a 30-day or 60-day extension? Ask them if they could please help you. Can they please do something where you are not having to send in as much—if any—money, or can they do something where you don’t have to get any late-payment charges?
Remember: If you are late on your payments, that counts against your FICO credit score and then that affects the interest rates and everything else that you do.
NEEDS VS. WANTS
You must make sure that you don’t spend money on wants—only needs. Every single penny must go to things that you need. No movies, no eating out, no vacations, no joyriding around in the car, etc. Sorry about that.
Okay, my friends, these are a few financial suggestions that you might be able to do to help you get by. I hope this has helped you and I’m so sorry that this is happening.