Table of Contents
- What are the Rules for a Financial Hardship Withdrawal?
- What Happens After the Hardship Withdrawal?
- TSP Hardship Withdrawals: Pros & Cons
- Advantages of a Hardship Withdrawal
- Drawbacks of Hardship Withdrawal
- Early Withdrawal Penalties and Avoidance Strategies
- Scenarios When Withdrawing Makes the Most Sense
- Scenarios When Withdrawing Makes Less Sense
- Is a Hardship Withdrawal Worth It?
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, 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 usually eligible, typically age 59 1/2. To deter people from taking early withdrawals, taxes and penalties are incurred in addition to the inability to replace withdrawn funds.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both your contributions and earnings, but as previously mentioned, you cannot replace any of these funds once they are withdrawn.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 four conditions:
- Negative Monthly Cash Flow: When your net income is repeatedly less than your expesnses. To determine negative cash flow, you 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 as well as the reason for the hardship. Maintaining a copy of this form for your records is a good idea.
- Medical Expenses (including household improvements needed for medical care): Unpaid medical expenses eligible for 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, railing and support bars, modified doorways and stairways, or elevators.
- 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. Costs for repairs and replacements that qualify for a federal income tax deduction, irrespective of IRS income limits, fair market value, or event frequency, are covered. However, ineligible losses include those due to normal wear and tear, business or income-producing property damage, and loss of deposits due to financial institution failure.
- 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 while CSRS employees only need to notify their spouse. For detailed information on eligibility and the application process, please refer to In-Service Withdrawals. This ensures adherence to regulations and maintains transparency in the withdrawal process.
Other Ways the IRS Prevents TSP Hardship Abuse
The IRS has other rules 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. 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. 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?
Before September 15, 2019, you could not contribute to your TSP account for six months after a hardship withdrawal. If you partcipated in FERS, you would not recieve 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.
Though, after September 15, 2019, this rule was eliminated by the Federal Retirement Thrift Investment Board (FRTIB), and a hardship withdrawal no longer has any effect on contributions to your TSP account.
However, you will not be able to apply for another financial hardship withdrawal request until six months have passed.
Track your TSP and other investments with Personal Capital’s free financial dashboard.
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 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, 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 in the future, which is one of the main reasons to have a TSP account.
Hardship withdrawals are not free. Treated as a distribution, the TSP will automatically withhold 10% of the funds you withdraw for federal income tax unless you instruct them 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
There are exceptions to the 10% penalty on withdrawals made before age 59 ½ for circumstances such as 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), mandates that participants that take substantially equal periodic payments (SEPPs) over at least five years are exempt to 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 taxes, no penalties are charged. Furthermore, if not needed, the withdrawal can be repaid to the IRA within two years, and QRDs apply to various tax-deferred accounts like 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 be 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 since 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 and would lose an additional 10% of the withdrawal in penalties
As you make this decision, weigh your options carefully and consider your individual needs, both current and future.
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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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]
865-643-0549
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!
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?
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!
Rhonda Chumbler says
What are some of the reasons for a tsp hardship loan to get rejected?
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.
romeo says
is it possible to waithdraw some of my tsp money to help me pay off my car?
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.
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?
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.
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
You may be able to – you will need to check with your TSP manger or HR department for more information.
michael says
I got a hardship withdrawal from my TSP do I need to claim it on my taxes?
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.
Michael says
Can you make more than one hardship distribution withdrawal.
Ryan Guina says
Michael,
Yes, you can. However, you can only make a withdrawal from the account associated with your active TSP account (you can take a withdrawal from both accounts if you have two active accounts — this would apply if you were a civil service employee and also served in the Guard/Reserves or another component).
The other limitation is that you can only make one hardship withdrawal every 6 months.
Here is more information: https://www.tsp.gov/planparticipation/inservicewithdrawals/financialHardship.shtml
Best of luck.
Yvonne Cole says
I currently have a TSP loan that I am making payments on. Can I still request an inservice withdrawl?
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?
Donne Thompson says
It is the same as a 401k. It is a retirement plan for federal employees. Specifically postal employees.
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.
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.
Ryan Guina says
Donne, I recommend contacting the Thrift Savings Plan administrators with your specific question.
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.
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.
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.
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 Guina says
Larry, you need to contact someone at the official TSP site.
Alice says
Do they really look at someones expenses when you are applying for hardship withdrawal?It’s my money.
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.
Ryan says
Robert, I’m sorry to hear about your situation. You will need to contact the Thrift Savings Plan for more information: Contact TSP.
Best of luck, and thank you for your service.
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.