Don’t pull from retirement accounts to fund PCS!

Q: My hus­band is an offi­cer in the Army. We were recently PCSed to Peter­son AFB, CO, and I had to resign from my teach­ing job to relo­cate with him. We are con­sid­er­ing remov­ing the money from MY teacher retire­ment account to defray some expenses. I have read that we can do this due to the PCS and NOT pay penal­ties and early fees. Is this true? And if so, where would I find the infor­ma­tion to send with my refund appli­ca­tion? Thank you so much for your time.
–Rachel, Col­orado Springs, Colorado

A: I’m not sure what you read, but I think you may be on a wild goose chase.  As you know, when you take a dis­tri­b­u­tion from a retire­ment plan like what you are con­tem­plat­ing it will be sub­ject to ordi­nary income tax.  In addi­tion, the IRS imposes an addi­tional tax or penalty of 10%. There are a num­ber of excep­tions to this addi­tional tax, but defray­ing the costs of your PCS move is not one of them.

Excep­tions to this penalty do include dis­tri­b­u­tions by a reserve com­po­nent ser­vice mem­ber who is called to active duty for at least 180 days, dis­tri­b­u­tions to cover cer­tain deductible med­ical expenses, dis­tri­b­u­tions made as part of a series of sub­stan­tially equal peri­odic pay­ments, or dis­tri­b­u­tions because you are totally dis­abled. Check out www​.irs​.gov for more information.

So, it would seem with­draw­ing money from your retire­ment plan could be a costly deci­sion as far as income taxes not to men­tion that it could hand­i­cap your efforts to build a retire­ment nest egg. Instead, con­sider some other options to help meet your expenses:

Take advance pay. Con­cur­rent to a PCS, the mil­i­tary autho­rizes advance pay of up to three months of basic pay, less deduc­tions. Essen­tially, this would be an inter­est free loan that would be paid back through pay­roll deduc­tion over the next 12 months.

Bor­row from the TSP. I’m not a big fan of this approach. How­ever, if you must, your hus­band (assum­ing he’s a TSP par­tic­i­pant) could bor­row as lit­tle as $1,000 and the smaller of 50% of the value of the account or $50,000. He would elect the repay­ment period of between one to five years (if the loan was for the acqui­si­tion of a home the term could be extended up to at total of 15 years). Loan repay­ments are deducted auto­mat­i­cally via pay­roll deduction.

Bor­row from bank. You may be able to get an unse­cured “sig­na­ture loan” from your bank or credit union. Typ­i­cally, these loans carry a rel­a­tively high inter­est rate, but your use of the funds is unrestricted.

I hope you get a fresh start in Col­orado and encour­age you to use the oppor­tu­nity to cre­ate a solid spend­ing plan or bud­get that allows you to live within your means and to con­tinue to save for the future.