Withdrawing from a TSP Without a Penalty

The Thrift Savings Plan (TSP) was created by the IRS to provide federal employees with certain tax advantages. In exchange for those advantages, the IRS limits a federal employee’s options for withdrawing from a TSP without penalty. If a withdrawal were made outside of the approved qualifying circumstances, the federal employee would be charged a ten percent (10%) penalty.

However, as any worker moves closer to retirement, circumstances may arise that require additional funds – and the TSP account could be the only available option.

Qualifying Circumstances

Like 401(k) retirement accounts, the IRS does provide for certain situations under which withdrawing from a TSP without penalty is permitted. Those situations include (but are not limited to) the following:

Taking Out a Loan

A common method for withdrawing from a TSP without penalty is borrowing funds, as opposed to a permanent draw. A federal employee can take out a loan of up to $50,000 against a TSP account without a taxation penalty. Most loans must be repaid (including interest) within five years of the loan approval date. In addition, the loan period can be extended up to 15 years if the funds are used to purchase a primary residence.

If a federal employee does not pay their loan back on time, however, the IRS will charge them income tax and 10% withdrawal penalties on the unpaid amount.

Extenuating Life Circumstances

A federal employee can also avoid the 10% early withdrawal penalty by using the funds to fulfill obligations related to certain life circumstances. More specifically, the federal employee does not incur an early withdrawal penalty if:

• The federal employee becomes permanently handicapped
• The federal employee becomes permanently handicapped
• The federal employee incurs medical expenses that exceed 7.5 percent (7.5%) of their annual income
• A federal employee uses the funds to satisfy a divorce settlement

In all cases, the withdrawal amount cannot exceed the amount required to fulfill the obligation in question.

Leaving A Federal Position At 55

A federal employee may choose to retire at the Minimum Retirement Age (MRA) after 30 years of federal service, even if they are not yet 59 and a half years old. This means that they are ineligible to withdraw penalty-free from certain retirement accounts, such as an IRA or 401(k) from a prior job.

The rules for withdrawing from a TSP without penalty, however, are different. Federal employees can withdraw funds from their TSP account without penalty if they meet the MRA requirements and leave their federal position – by resigning or retiring – at the age of 55 or older.

If the MRA requirements are met, funds can be withdrawn for any purpose.

“Special” Positions

The IRS incudes a separate provision for special category personnel who are eligible to withdraw funds from a TSP account if they retire at the age of 50 or later. These positions include (but are not limited to):

• Capitol Police officers
• Supreme Court officers
• Firefighters

Know the Rules Before You Withdraw

The rules for withdrawing from a TSP without penalty are not always transparent, and determining whether you qualify may often require guidance.

At Benefit Resource Partners, we understand that these requirements can be unclear. Our experienced finance professionals are available to help advise you on your potential options.

Contact us today to see if you are eligible for an early TSP withdrawal.