TSP Hardship Withdrawal Requirements and Pros & Cons

The Thrift Savings Plan (TSP) allows members to withdraw funds in a financial emergency. While this can be helpful in a tight situation, it is not a decision to take lightly. When you withdraw money early, you cannot replace it in the TSP, and you will lose out on any potential growth.

The TSP is similar to a 401(k) plan: a long-term retirement savings plan with tax-deferral advantages. It is not designed as a temporary savings account or to be tapped into before you are usually eligible, typically at age 59 1/2. To deter early withdrawals, you must pay taxes and penalties, and you can’t replace withdrawn funds. Strict restrictions also determine eligibility for early withdrawals.

What are the Rules for a Financial Hardship Withdrawal?

TSP members only qualify for financial hardship withdrawals if the federal government still employs them. The amount of the financial hardship withdrawal is limited to your financial need, but you cannot withdraw less than $1,000. You may be able to withdraw both your contributions and earnings, but as mentioned, you cannot replace any of these funds once you withdraw them.

To be eligible for a hardship withdrawal, your financial need must result from any of these conditions:

1. Medical Expenses (including household improvements needed for medical care): Unpaid medical expenses eligible for a federal income tax deduction due to medical conditions, illnesses, or injuries affecting you, your spouse, or your dependents at the time of your financial hardship withdrawal request. This includes unpaid expenses for household improvements needed because of these medical conditions, such as wheelchair ramps, railings and support bars, modified doorways and stairways, or elevators. 
2. Negative Monthly Cash Flow: When your net income is repeatedly less than your expenses. To determine negative cash flow, you can utilize the worksheet provided with the Financial Hardship Withdrawal Request (Form TSP-76). You do not need to return the worksheet when requesting a financial hardship withdrawal. However, you must affirm under penalty of perjury that you have a genuine financial hardship and state the reason for the hardship. Maintaining a copy of this form for your records.
3. Personal Casualty Losses: Damage, destruction, or loss of property from sudden, unexpected, or unusual events like earthquakes, hurricanes, tornadoes, floods, fires, or theft, excluding losses caused by your own willful negligence. Covers repair and replacement costs that qualify for a federal income tax deduction, regardless of IRS income limits, fair market value, or event frequency. However, ineligible losses include those due to normal wear and tear, damage to business or income-producing property, and loss of deposits resulting from a financial institution failure.
4. Legal Expenses: Limited to unpaid legal fees and court costs related to a separation or divorce from your spouse.
   

Spousal consent is required for FERS employees and members of the uniformed services to withdraw funds due to financial hardship, whereas CSRS employees need only notify their spouse. For detailed information on eligibility and the application process, see the In-Service Withdrawals section. This helps ensure compliance and maintains transparency in the withdrawal process.

Other Ways the IRS Prevents TSP Hardship Abuse

The IRS has additional rules you must follow before making a hardship withdrawal from your Thrift Savings Plan. 

• The withdrawal must meet an immediate and heavy need. This stipulation helps define hardships as current and serious problems, not anticipated or minor ones.
• The withdrawal must be the only option available to meet the need. Do you have other options to solve the problem? Exhaust those first.
• The withdrawal must satisfy the need. Amounts above the need are not permitted: you can’t withdraw a little extra to smooth things over for a few months. You must use the withdrawal exclusively for the specified hardship.
• You can’t make the withdrawal before taking all non-taxable distributions or loans from the TSP. You’ll have to wait until after you’ve gotten your scheduled distributions (if you’re old enough to receive distributions) before seeking a hardship withdrawal.

What Happens After the Hardship Withdrawal?

Before September 15, 2019, you could not contribute to your TSP account for six months after a hardship withdrawal. If you participated in FERS, you would not receive any Agency Matching Contributions because you were not eligible to contribute to the TSP. After the six-month waiting period or after September 15, 2019, you also had to change your contribution election form to resume contributions.

After September 15, 2019, the Federal Retirement Thrift Investment Board (FRTIB) eliminated this rule, and a hardship withdrawal no longer affects contributions to your TSP account. 

However, you can’t apply for another financial hardship withdrawal request until six months have passed. 

Track your TSP and other investments with Empower’s (formerly Personal Capital) free financial dashboard.

TSP Hardship Withdrawals: Pros & Cons

As with any important financial decision, take a few minutes to consider the pros and cons of a TSP hardship withdrawal.

Advantages of a Hardship Withdrawal

The advantage of making a hardship withdrawal is clear and simple: you can access your money in a qualifying emergency.

This can prevent the hardship from worsening and keep you from seeking solutions like loans or credit cards, which often have high interest rates.

Also, unlike a TSP loan, hardship withdrawals do not have to be repaid into your TSP account, so you won’t have to add another monthly loan payment to your budget.

Drawbacks of Hardship Withdrawal

Even when you have a great reason to withdraw money from your TSP before retiring, you’re still taking a distribution from your retirement account for purposes other than retirement.

By taking money out now, you prevent it from growing in the future, which is one of the main reasons to have a TSP account.

Hardship withdrawals are not free. Because the TSP treats them as a distribution, it will automatically withhold 10% of the funds you withdraw for federal income tax unless you instruct it to withhold a different amount. You will also incur a 10% early withdrawal penalty if you are not at least age 59 1/2. 

Early Withdrawal Penalties and Avoidance Strategies

Exceptions to the 10% penalty on withdrawals made before age 59 ½ include death, disability, and certain medical expenses. Additionally, some plans allow penalty-free withdrawals starting at age 55 if the participant separates from employment in or after the year they turn 55.

Another key rule, Rule 72(t), exempts participants who take substantially equal periodic payments (SEPPs) over at least five years from the 10% additional tax. However, this is subject to strict IRS guidelines.

First-time homebuyers may also withdraw from a Roth IRA without penalty. Less commonly known are Qualified Reservist Distributions (QRDs), which enable Reserve and National Guard members to make early withdrawals from their TSP & IRAs penalty-free if they were mobilized after September 11, 2001, for at least 180 days or an indefinite period, and take the distribution during that period. While these withdrawals are still subject to income tax, no penalties apply. Furthermore, if you don’t need it, you can repay the withdrawal to the IRA within 2 years, and QRDs apply to various tax-deferred accounts, such as IRAs, 401(k)s, TSPs, and 403(b)s.

Scenarios When Withdrawing Makes the Most Sense

Only you can know your precise situation, but here are some scenarios in which a hardship withdrawal may make the most sense:

• If you anticipate a substantial tax refund
  • This would make it easier to manage the taxes on the funds you withdraw.
• If your monthly budget simply won’t allow the addition of another loan payment from either a TSP loan or a commercial loan from your bank or credit union
• The money you’re saving in your TSP account represents a less significant portion of your retirement plan.
  • For example, most of your retirement savings are in other investments you can’t access.
• If you’re 59-½ years old or older, you can avoid the 10% distribution penalty
• If you’re permanently disabled and can withdraw money penalty-free (though not tax-free)

Scenarios When Withdrawing Makes Less Sense

Again, your situation is unique, and you should treat it that way, but here are some times when hardship withdrawals may make less sense or be ill-advised:

• If you are filing for bankruptcy
  • Your TSP account could shield those assets from seizure. Your bankruptcy attorney should advise you about these specifics.
• If you have not saved or planned for retirement other than your TSP account
• If you already expect to owe taxes next year and are unsure how you’ll pay them
  • A hardship withdrawal from your TSP is generally taxable as ordinary income. This means the amount you withdraw will be added to your taxable income for the year, potentially pushing you into a higher tax bracket and increasing the amount of tax you owe.
• If you are younger than 59-½ years old, you would lose an additional 10% of the withdrawal in penalties

As you make this decision, weigh your options carefully and consider your current and future needs.

Is a Hardship Withdrawal Worth It?

In the most urgent cases, you can probably justify it. But because you will have to pay taxes, possibly pay a lot in penalties, and limit the potential for the growth of your retirement funds, this may not be the best option. I would strongly consider applying for a loan before paying these taxes and penalties. As with everything, your situation is unique, and you should consult a professional financial advisor before deciding whether or not to pursue this avenue.

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Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Tennessee Air...

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