TSP Hardship Withdrawal Requirements and Pros & Cons

The Thrift Savings Plan (TSP) has a feature that allows its members to withdraw money during a financial emergency. But that flexibility comes at a substantial cost. Here is the info you need to decide if a hardship withdrawal is right for you.
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TSP requirements investor
Table of Contents
  1. What are the Rules for a Financial Hardship Withdrawal?
    1. Other Ways the IRS Prevents TSP Hardship Abuse
  2. What Happens After the Hardship Withdrawal?
  3. What is the Cost of a Financial Hardship Withdrawal?
    1. Taxes on the Amount Withdrawn
    2. Early Withdrawal Penalties
    3. 6 Month Pause on New Contributions
  4. TSP Hardship Withdrawals: Pros & Cons
    1. Advantages of a Hardship Withdrawal
    2. Drawbacks of Hardship Withdrawal
  5. Is a TSP Hardship Withdrawal Right for You?
    1. Scenarios When Withdrawing Makes More Sense
    2. Scenarios When Withdrawing Makes Less Sense
  6. Is a Hardship Withdrawal Worth It?
  7. Qualified Reservist Distribution – TSP & IRA Withdrawals for Reservists
  8. Early Withdrawal Penalties and How to Avoid Them
  9. Qualified Reservist Distribution – How Mobilized Reservists Can Take Penalty-Free Early Withdrawals

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 in the TSP, and you will lose out on any potential growth from those funds.

The TSP is designed similarly to a 401(k) plan, 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To deter people from taking early withdrawals, taxes and penalties are assessed in addition to the inability to replace withdrawn funds.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 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 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:

  1. Negative Monthly Cash Flow: To determine negative cash flow, one can utilize the worksheet 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. Maintaining a copy of this form for your records is a good idea.
  2. Medical Expenses (including household improvements needed for medical care)
  3. Personal Casualty Losses
  4. Legal Expenses for Separation or Divorce

Other Ways the IRS Prevents TSP Hardship Abuse

The IRS has other rules you’ll need to 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 and not anticipated or minor problems.
  • The withdrawal must be the only option available to meet the need: Have other options to solve the problem? You should 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. The withdrawal must be used exclusively for the specified hardship.
  • The withdrawal cannot come before all non-taxable distributions or loans have been obtained 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?

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 when you are not eligible to contribute to the TSP. You will, however, continue receiving your agency’s automatic (1%) contribution.

After the 6-month waiting period, you must 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. Your 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 on the Amount Withdrawn

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.

Early Withdrawal 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.

TSP Hardship Withdrawals: Pros & Cons

Like any important financial decision, you should take a few minutes to consider the pros and cons of making a 401(k) 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 come with high-interest rates.

Also, unlike a TSP loan, hardship withdrawals do not have to be repaid into your 401(k) account so you won’t be adding another monthly loan payment to your budget.

Drawbacks of Hardship Withdrawal

Even when you have a great reason to withdraw money from your 401(k) before retiring, the fact remains that you are taking a distribution from your retirement account for purposes other than retirement.

By taking money out of your account now, you’re preventing that money from growing into the future, which is one of the main reasons to have a 401(k) account.

And hardship withdrawals are not free. Treated as a distribution, the hardship withdrawal is subject to income tax and the 10% early withdrawal penalty if you are not at least age 59 1/2.

Is a TSP Hardship Withdrawal Right for You?

Will the short-term benefits of taking money from your retirement account outweigh the long-term consequences?

Only you can answer that. As a general rule, tapping into retirement savings should be avoided whenever possible.

But hardship withdrawals exist for a reason. If you’ve determined the withdrawal makes sense for your situation, you can proceed as you see fit.

Scenarios When Withdrawing Makes More Sense

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

  • If you expect a sizeable tax refund and can more easily absorb the taxes, you’d be assessed on the withdrawn money.
  • 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. If, for example, most of your retirement savings are in other investments you can’t access.
  • If you’re 59-½ years old or older since you can avoid the 10 percent 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: You should leave your TSP money alone since 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.
  • If you are younger than 59-½ years old and would lose an additional 10 percent of the withdrawal in penalties.

Weigh your options carefully and look at your individual needs, both current and future, as you make this decision.

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 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.

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 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 before 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 they turned 55.

Rule 72(t) also requires participants to take substantially equal periodic payments (SEPPs) over a minimum of 5-years. There are very strict IRS guidelines outside this article’s scope.

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 also make a QRD from your Thrift Savings Plan account. (See page 7 of that PDF.)

Remember 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 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 you didn’t need the withdrawal, 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.

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  1. Betty says

    I am a Widow of a 9yr Veteran of Vietnam. He passed away 100% Permanent and total. I have the home loan benefit but I am unable to find a Morgage Company. For 2 years the IRS notified me someone was using my identity to file taxes. Then I received Notification for a Medical Insurance Billing Company that a Company called AMCA had sold my information to the Dark Web. They have destroyed my life Three years ago I had a savings account of over $17,000. I was hit by Google.com and Amazon.com for over $7,000. My bank refunded less than a fourth. I have a rare bone marrow disease which led to the amputation of my right leg. I have been homeless for over 6 months now. I have no home to put my Hospital bed in. I have legal DOCUMENTED proof of everything I am telling You. I have made claims with every Government Agency I can find. My credit is ruined. I am a Victim and I can’t believe Our Government can’t do anything to help me.My Husband gave his life fighting for Our Nation and this is how his Widow is treated.
    Thank You for Your time
    Betty J Beech
    Claim Id# 440-46-6535
    [email protected]

    • Brittany Crocker says

      Hey Betty, I’m really sorry to hear all of this. If you haven’t yet, definitely reach out to the Federal Trade Commission to report the identity theft at 877-438-4338. I saw your phone area code is in Knoxville. If you live in Knoxville, the local community action committee’s social services might be able to point you in the right direction. Their number is 865-546-3500. Or, you can reach out the their seniors office at (865) 524-2786. Additionally, a VA case worker told me you can reach out to the Mountain Home VA’s homelessness office at 865-545-4592 SW Homeless program. If that number doesn’t work you can try 888-313-5421 and ask for the VA homelessness team. You’ll need to provide some information about your husband, but they should be able to help you out.

      I hope these resources can help you!

  2. Brandon McDaniel says

    I have stopped paying into my tsp. I am still active but want to close out my account. How can I do it?

  3. Robert says

    Hello, I am going to request a hardship withdrawal. I just received my 2018 annual statement. Can anyone tell me which one of the amounts shown on this statement is the amount eligible to be withdrawn? Is it only the ending balance under “Summary of your account activity 2018” or is it the amount shown as the total for “share summary by fund” or is there some other amount I am not able to see? Please help me figure this out. Thank you for you time and attention.

    • Ryan Guina says

      Hello Robert,

      I recommend asking the TSP customer support desk. They will be able to provide the most accurate information, as well as explain how it works, any limitations, and help you process the request.

      Best wishes!

  4. Paul says

    Ryan, If I take out a 50K hardship withdrawal and use all of it to pay off credit card debt ($25,000) and the remaining TSP loan (20K), would the withdrawal be considered taxable income? Looking at 1099R, under which specific circumstances would TSP consider the withdrawal to be non-taxable ($0.00 in Box 2a on 1099R)?

    • Ryan Guina says

      Paul, I do not believe you are eligible for a hardship withdrawal under these circumstances, unless your credit card payments and TSP loan payments are causing the financial hardship (I.e. the monthly payments are preventing you from keeping your head above water). Here is a statement directly from the TSP:

      “To qualify, you must have an immediate and significant financial need that necessitates a distribution from your TSP account and your 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. You cannot request a financial hardship withdrawal for expenses that you have already paid or that are reimbursable to you.” (source, 2nd paragraph).

      Based on the same document, it looks like all withdrawals are taxable unless they are from tax-exempt contributions, or the Roth TSP. In addition, you would be required to pay a 10% early withdrawal penalty on the amount withdrawn (if under the age of 59.5). I am unaware of any exceptions to these conditions.

    • Ryan Guina says

      Romeo, You can withdraw some of your TSP at any time, but you would need to pay early withdrawal penalties unless you are already age 57.5 or older or you qualify for a hardship withdrawal. Early withdrawal penalties typically cost an immediate 10% penalty, plus you need to pay taxes on the withdrawal. For example, if you make an early withdrawal of $10,000, you would pay taxes on it (probably at least $2,500), plus 10%, which is $1,000. So your $10,000 withdrawal would only get you around $6,500, and 35% of your withdrawal would immediately go to the IRS. In most cases, an early withdrawal is a bad idea. I hope this helps.

  5. Frank says

    got over 50K in TSP and going through a short sale with my home in Florida. I have a 2nd mortgage for 38K and am looking at withdrawing TSP to help – all if possible. Thoughts?

  6. Jimmy says

    I will be retired from the National Guard as of 22 sept this year, I have been an Active Guard Reserve service member since 2002, i have a negative cash flow and have exhausted all avaliable means to secure outside resources. I am currently in a bad situation with my mortgage holder, how can i receive my tsp funds to get back on track since i will no longer be employed by the government and i am age 41. Thanks for your assistance.

  7. Gia says

    My question is that we took out an in-service financial hardship withdrawl last September, but my question is are we able to reapply for another one? I ask this because I got a letter stating that we couldn’t make employee contributions until recently. So basically are we able to take out another loan?

    • Ryan Guina says

      Michael, The TSP should report the hardship withdrawal to the IRS, but I recommend asking your accountant about it, or if you use software, ask about it in their support forums.

    • Joyce Brown says

      Yes you will claim it on your taxes. They will send out a form that will have to be claimed. I did this. It was worth it and it wasn’t worth it because they added it as income. Hope this helps.

    • Ryan Guina says

      Yvonne, to be honest, I am not sure. The TSP information page on hardship withdrawals was not clear on that topic. I recommend contacting the TSP Help Line for more information.

    • Tracy says

      Yvonne, we have a tsp loan that we’re making payments on. We were able to take an in-service hardship withdrawal more than 6 months ago. We just tried to take a 2nd one because we have to have major car repairs done and have negative cash flow because of it. The website says it was rejected so we’re waiting for the letter of explanation. It amazes me that things seem to happen to us every 6 months……But I hope that answer helps you…….

      • Angela says

        This is a really old post, but I was wondering if there was a follow up to your rejection? I am wondering what the grounds would be to reject? I just applied for an in-service hardship withdrawal and now I’m nervous that they may reject me. Did they give you a basis for rejecting you, if you don’t mind me asking?

    • Ryan Guina says

      Yes, Donne, the process and rules are the same. You should contact the TSP administration office or your TSP representative for more information if you need to request a hardship withdrawal.

  8. Donne Thompson says

    I am on workers compensation or will be for the foreseeable future. I have not started receiving workers compensation checks yet. When I do receive workers compensation checks they will not cover my monthly bills. I do not want to fall behind in mortgage or other bills. I would take out a loan from my tsp but because I am in non-pay status I don”t qualify. After the 6 months I can request to start contributing to my tsp again: I would like to know if I will be allowed to participate in the tsp catch-up contribution after the 6 month waiting period.

  9. daleingham says

    100% Service Connected and Individually Unemployable. Have TSP of 72K and am unable to make contributions for over two years. Since S/C of 100% am unable to contribute any more. Please advise best recommendation, roll over into current Roth’s, pull it all out what man? I need advise. Regards, Dale

    • Ryan Guina says

      Dale, here are some rollover options for the Thrift Savings Plan. This will give you a little more information about what you can do with the funds in your TSP. Before taking action, I recommend sitting down with a financial planner who can better help you understand your current financial situation and help guide you to make the best long term decision for your needs. Without knowing anything else about your financial situation, my first inclination would be to either leave your funds in the TSP, or move them into an IRA or other long term retirement account. This will do 2 things: help you prepare for the long haul and give you more money for retirement, and 2) maintain the tax advantages of the funds which are currently in your TSP (if you withdraw them before your eligible withdrawal age, you may be subjected to taxes and 10% early withdrawal penalties).

      That said, I don’t know your entire financial situation, which is why it would be a good idea to meet with a financial professional who can take the time to go over your entire financial situation with you and help you understand your options and make the right decision. Best of luck, and thanks for your service.

  10. Elle Thompson says

    Larry, if you got a notice from IRS – you have an opportunity to revisit this 2008 tax year, perhaps there is some deduction that you missed, and you can claim it to offset. Review your 2008 taxes to make sure that this is the case – did you miss something? Make sure the IRS is right – also worst case – IRS will work out a payment plan for you. Call them for this form.

  11. Michael says

    I’m in a financial bind. I have a negative cash flow, and the problem is if I can’t pay off some of the debt I can lose my job since I have a security clearance. I’ve tried loans, but even with a 700+ credit score, I have too much debt. I’m considering this option and realize that taxes will bite me big time, but have few other options. Making the right move?

    • Ryan Guina says

      Michael, if you have exhausted all other outlets, then it may be a viable option. The most important thing to do if you decide to make a hardship withdrawal is to make sure you will only have to do this once. That means take out enough that you will be able to pay off any major debts that are causing the negative cash flow. You will also want to make changes to your situation. For example find ways to decrease your monthly expenses, stop using credit where possible, etc.

      As a last ditch effort, you might try applying for a personal loan through Lending Club or Prosper, which are different from banks, and allow regular people to offer loans through a process call peer-to-peer lending. This may be an alternative for you.

  12. Larry says

    if i just got a letter from the IRS saying there was a mistake on my 2008 federal income taxes and i owe over $3000 in less than a month can i get a hardship loan?

    • Ryan says

      Alice, This only applies to in-service withdrawals, meaning if you are still employed by the government and participating in the Thrift Savings Plan. If you have an inactive account and are no longer actively contributing, you can make a withdrawal at any time (but it may be subject to takes and early withdrawal penalties under certain circumstances).

      These rules are in place because of IRS tax laws. The IRS provides tax benefits for retirement plan participants and creates the penalties as an incentive to leave the money in the retirement account.

      I don’t have much information beyond that. If you have further questions, you should contact the Thrift Savings Plan or an accountant. Best of luck.

  13. Robert Jeziorowski says

    I would like to look into using my TSP Hardship Loan. My wife has not worked in two years due to illness. We have looked into private loans and it cannot work. We understand the requirments and realize we need this loan to get back on track with medical bills and personal finances. Your prompt consideration in this matter is greatly appreciated.

    Thank You.

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