financial planner Stephen Zelcer
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Q&A - Should I use my TSP to start a business?

Question

My wife and I started a business, but due to COVID, materials, construction prices dramatically increased and permitting delays we have not been able to open the business in the original time frame planned for. As a result we will very quickly find ourselves unable to pay all of our bills as the money we had saved has been used for the business. This is the last month we can pay our monthly bills. Our only option left is a TSP hardship withdrawal to draw down the debt.

The question I have is would this qualify for a hardship loan, or do we have to start missing debt payments first? We don’t want to miss payments and we don’t want our credit affected negatively. (TS207)

Answer

Hi,

I’m sorry to hear about this situation.  I’ve seen it before.  It’s stressful.
I also want to commend you on being entrepreneurial.  In general, I encourage people to diversify their income by having a side business investment.  It’s good for them, and it’s good for the economy.  

I also want to point out that many businesses struggle to get off the ground, and it may take time before your business flourishes.  I hope you persevere.  

Now, regarding your question:
Yes, this situation would qualify for a TSP hardship withdrawal.  See here: https://www.tsp.gov/bulletins/19-9/ 

“To qualify for a hardship withdrawal, the participant must have an immediate and significant financial need that necessitates a distribution from his or her TSP account. The need must arise out of either a recurring negative monthly cash flow situation, medical expenses, legal expenses for separation or divorce, or personal casualty loss. Hardship requests cannot be taken for expenses already paid or those that are reimbursable.”
Since you have a recurring negative cash flow, you would qualify.

But then we have to ask whether you should do a hardship withdrawal. 
Firstly, if you are under age 59 1/2, your TSP distribution will be subject to a 10% penalty.  
Second, you will owe income tax on such a distribution, and the TSP has a mandatory 10% tax withholding (you may owe more than 10%). 
So, off the bat, you will receive at least 20% less than you think.  

Do you have any home equity you can tap into? Do you have other assets that you can divest? Do you have any potential investors who can provide a cash infusion?  

And, before you entertain pouring any additional money into this business, you should definitely have a business plan that tries to measure how viable your venture is.  I’m a big fan of the entrepreneurial spirit, but if an honest business projection shows that the business will barely keep its head above water, you may need to pull the plug and cut your losses – or re-strategize the whole thing.  I wouldn’t want to reach a financial point-of-no-return.  

Ultimately, if you are driven to make the sacrifices needed to make this venture a success, then push and flex.  You may be blessed with success and you may become a source of income to future employees which, in turn, will cause your blessings to compound and flourish. 

Stephen Zelcer

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