Dear Dave,
The other day, my wife and I discovered a Thrift Savings Plan (TSP) we’d forgotten about for over 10 years from my time in the Army. There’s a little over $3,200 in there. We’re both in our 30s, and we’re trying to save up our starter emergency fund in Baby Step 1 of your plan. We were wondering if we should withdraw the money and use it toward Baby Steps 1 and 2 or just leave it in there.
—Todd
Dear Todd,
The best thing to do is roll the money over into an Individual Retirement Arrangement (IRA). Otherwise, you’re going to be hit with a 10 percent penalty—plus your tax rate—and end up paying 30 percent to 40 percent of it to the government. That’s kind of like asking, “Would it be a good idea to borrow $3,200 at 30 percent interest to pay off debt?” Of course not! That would be a really dumb idea. And in a sense, that’s what you’d be doing by just taking the money out of the TSP….