The Thrift Savings Plan (TSP) has a feature that allows its members to withdraw money during a financial emergency. While this can be helpful in a tight situation, it is not a decision to take lightly. When money is taken out early, it cannot be replaced into the TSP and you will lose out on any potential growth from those funds.
The TSP is designed similar to a 401(k) plan, it is a long-term retirement savings plan with tax deferral advantages. It is not designed to be a temporary savings account, or to be tapped into before you are normally eligible, which is age 59 1/2. To deter people from taking early withdrawals, taxes and penalties are assessed in addition to the inability to replace withdrawn funds. Strict restrictions are also in place to determine who is eligible for an early withdrawals.
What are the Rules for a Financial Hardship Withdrawal?
TSP members must still be employed by the Federal Government to be eligible for financial hardship withdrawals. 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and earnings for a financial hardship, but as previously mentioned, you cannot replace any of these funds once they are withdrawn.
To be eligible for a hardship withdrawal, your financial need must result from any of these 4 conditions:
- Negative Monthly Cash Flow: To determine negative cash flow, one can utilize the worksheet that is provided with the Financial Hardship Withdrawal Request (Form TSP-76). You do not have to return the worksheet with your request for a financial hardship withdrawal, however, you will be required to affirm under penalty of perjury that you have a genuine financial hardship and the reason for the hardship. It is a good idea to maintain a copy of this form for your records.
- Medical Expenses (including household improvements needed for medical care)
- Personal Casualty Losses
- Legal Expenses for Separation or Divorce
What Happens After the Hardship Withdrawal?
Besides the inability to ever repay the funds you withdrew from your TSP account, you cannot contribute to your TSP account for 6 months. If you participate in FERS, you will not receive any Agency Matching Contributions during the time you are not eligible to contribute to the TSP. You will, however, continue receiving the automatic (1%) contribution from your agency.
At the conclusion of the 6-month waiting period, you will need to change your contribution election form if you wish to resume contributions. You will not be able to apply for another financial hardship withdrawal request until 6 months have passed.
What is the Cost of a Financial Hardship Withdrawal?
A lot. You future retirement income will be permanently diminished by the amount you withdraw, plus the earnings you may have realized on your investment. The other consideration is taxes and penalties.
- Taxes: Your withdrawal is subject to Federal income tax, and may also be subject to state income tax as well. The TSP will automatically withhold 10% of the funds you withdraw unless you instruct them to withhold a different amount.
- Penalties: If you are less than 59 ½ when you make the withdrawal, you may be subject to a 10 percent early withdrawal penalty tax in addition to the income tax.
- 6 Month Pause on New Contributions: In addition, if you are a FERS employee, you will also not receive any matching contributions because you will not be making employee contributions. You will continue to receive the automatic 1%, but you will be leaving a lot of other funds on the table and will never be able to recover them.
Is It Worth It?
In the most urgent cases, you can probably justify it. But because you will have to pay taxes, possibly a lot in penalties, and are limiting the potential for the growth of your retirement funds, this is may not be the best available option. I would strongly consider applying for a loan before paying so many taxes and fees. As with everything though, your situation is unique and you should consult with a professional financial advisor before deciding whether or not to pursue this avenue.
For more detailed information about TSP financial hardship withdrawals, please visit the official TSP page – TSP Features for Civilians.
For more detailed information about the tax rules affecting in-service withdrawals, read the tax notice “Important Tax Information About Payments From Your TSP Account.”
Qualified Reservist Distribution – TSP & IRA Withdrawals for Reservists
Did you know that Reserve and National Guard servicemembers can make penalty-free withdrawals from their IRAs?
Ed Slott has been the national expert on IRAs for over a decade, and he has the credibility to offer this advice from the IRS IRA regulations. A “Qualified Reservist Distribution” allows withdrawals from tax-deferred accounts like IRAs, 401(k)s, 403(b)s, and others.
Early Withdrawal Penalties and How to Avoid Them
Most retirement plans have a 10% early withdrawal penalty if you make withdrawals prior to age 59 1/2. This is in addition to any other taxes you may have to pay (which you will if it is a Traditional retirement account).
Some people know that there are exceptions to the penalty when the early withdrawal is for death, disability, and certain medical expenses. Some accounts also allow participants to begin penalty-free withdrawals at age 55 if their separation from their employer came on or during the year in which they turned age 55.
There is also Rule 72(t), which requires participants to take substantially equal periodic payments (SEPPs) over a minimum of 5-years. There are very strict IRS guidelines that are outside the scope of this article.
Many people also know that a first-time homebuyer can take a Roth IRA withdrawal.
But few people (me included) have heard about QRDs.
Qualified Reservist Distribution – How Mobilized Reservists Can Take Penalty-Free Early Withdrawals
Here are the requirements:
- be mobilized after 11 September 2001 for at least 180 days, or for an indefinite period
- take the distribution during that period
Yes, you can make a QRD from your Thrift Savings Plan account too. (See page 7 of that PDF.)
Keep in mind that even when you can make a QRD, you should only do so as a last resort. It’s intended to help with temporary cash flow problems during a mobilization, and you’re essentially cannibalizing your retirement income for today’s financial emergency.
It’s better than taking on credit-card debt, but it’s also a sign of a financial problem that has to be addressed and corrected. You should have an adequate emergency fund for deployment surprises, and ideally, you’d return the money to your retirement account as soon as the problem is dealt with.
You’ll still pay regular income taxes on the withdrawal, but there will be no penalty.
Even better, if you decide that you didn’t need the withdrawal then you can repay the QRD to your IRA within two years of the withdrawal. Read those links for more details and consult with a tax advisor before you try this at home.