Should You Use TSP to Pay Off Your Mortgage in Retirement?

Being debt-free is a great feeling, isn’t it? Maybe you’ve followed Dave Ramsey’s baby steps up until this point, and your goal is complete financial freedom—no debt, no financial stress, and definitely no mortgage hanging over your head in retirement. 

As a financial advisor, I sit across the table every day from federal employees just like you. One of the the big questions I’m asked all the time is: “Should I use my TSP to pay off my mortgage?”

I understand the temptations. You see the money sitting in your TSP statement, and right next to it, there’s your outstanding mortgage balance staring back at you. It feels like a simple solution: Move one number to erase the other. Being debt-free feels like freedom. 

Debt can weigh you down. As someone who has managed 54 houses—44 paid off and 10 with mortgages—I can tell you, I always worry about the 10 with mortgages.  

But is your desire to be debt-free worth making a sizable withdrawal from your retirement savings? 

Key Factors to Consider Before Using Your TSP for Mortgage Payoff 

Before you tap into your retirement funds, here are some key considerations every federal employees should weigh: 

1. You’re never truly debt-free.

Even without a mortgage, you still have ongoing costs like property taxes, homeowners insurance, and maintenance.  

2. Compound Growth vs Simple Interest

Mortgages are based on simple interest, while your TSP grows with compound interest. Over time, inflation makes your mortgage worth less and your house worth more. .  

3. Income Flexibility

With multiple income streams in retirement (Social Security, pension, TSP withdrawals), many federal retirees comfortably make mortgage payments without needing to make a large lump-sum withdrawal.

4. Tax Implications of TSP Withdrawals

TSP withdrawals are taxed as ordinary income. A $100K mortgage payoff might require taking $120K or more to cover taxes—potentially pushing you into a higher tax bracket.

5. Income Steam Stability

Real estate isn’t liquid unless you sell or refinance. In the event of an unexpected expense or emergency, money in your TSP can be more easily accessed than equity in your home. 

6. Asset Appreciation vs. Depreciation

A home usually appreciates in value. If you’re focused on debt elimination, it’s often wiser to focus on high-interest, depreciating debt like auto loans and credit cards.

7. The Purpose of Your TSP

TSP, IRA, and 401(k) accounts are specifically designed to provide retirement income—not for early debt payoff, especially if that debt is manageable and low interest.

Example: When Paying Off Your Mortgage with TSP Can Backfire

Let’s say your mortgage is $100K at 3.5%, and you have $300K in your TSP invested in the G Fund earning 4%. It seems logical to withdraw $100K to pay it off.  

But when you withdraw that money, your taxable income spikes. If your household income was $180K, it suddenly becomes $280K, possibly pushing you into a higher tax bracket. You might need to withdraw more than $100K to cover taxes, and the ripple effects can increase your Medicare premiums through IRMAA.  

What felt like a relief may turn into a financial headache.

When It Might Actually Make Sense

If your mortgage rate is significantly higher than the safe return you’re earning in the TSP, it might make financial sense to pay it off. For example, if you’re earning 4% in the G Fund but paying 9% on a mortgage, you’re going backwards financially. 

If you do choose to pay it off, do it smart: Spread the withdrawal across two tax years. That way, you minimize the tax impact and avoid bumping yourself into a higher bracket all at once. This is where working with a CPA and a financial advisor can make a big difference. 

The Bottom Line 

The majority of federal employees locked in historically low mortgage rates a few years ago. For them, it rarely makes sense to pay off a mortgage early with TSP funds. Instead, weigh the math, the taxes, and your peace of mind. Remember that your retirement accounts are designed for income security, not for debt elimination. 

Before making any large withdrawal from your TSP, it’s crucial to understand the full impact on your taxes, retirement income, and long-term financial health.

👉 Watch our YouTube breakdown on this exact topic, where Andrew McNair explains how to balance debt freedom with financial security.

Or, if you’re ready to see what’s best for your specific situation, schedule a no-cost consultation with our team at SWAN Capital today! We’ll help you make informed choices—so you can truly sleep well at night.

Schedule Your No-Cost Consultation Today!

COVERING OUR TAIL FEATHERS 

Welcome to Swan Capital, LLC (“SWAN”), your friendly neighborhood Registered Investment Adviser (“RIA”). Now, while we may have a fancy title, remember that our registration doesn’t guarantee we’re flying high above the rest. This communication hasn’t been blessed or verified by the United States Securities and Exchange Commission (SEC) or any state securities authority. At SWAN, we believe in giving you personalized investment advice as unique as a swan’s graceful glide. We work with clients in their own states, making sure to play by all the regulatory rules or find the right exceptions. But here’s the scoop: all investments come with risks—like a wild swim in the pond—so no investment strategy can promise profits or protect you from the occasional splashdown. Just remember, past performance is like a cozy old story; it might be nice to reminisce about, but it doesn’t promise what’s coming next. 

SWAN Capital, LLC is an independent firm and is not affiliated with, endorsed by, or sponsored by the Federal Employee Retirement System (FERS) or any government agency. 

Thanks for gliding along with us at SWAN! We’re here to help you soar to new financial heights while ensuring you can truly Sleep Well At Night!