In this week’s column, I’ll respond to readers’ frequent questions about the rules governing access to a Thrift Savings Plan account before age 59½. The good news is you can access the value of your TSP account, if you need it, at any age. The bad news is there are restrictions and penalties that may apply.
As long as you are eligible to make contributions to the TSP – that is, still employed by the federal government – you have two ways to access your TSP account before reaching age 59½, depending on whether you can prove serious financial hardship resulting from negative cash flow, medical expenses, casualty losses or certain legal expenses.
If you can’t demonstrate the required financial hardship, your only access to the TSP while you’re still in service is via a loan. You may borrow up to the greater of $50,000 or 50 percent of your vested account balance, and you must repay the loan, with interest, according to a fixed schedule – with a maximum repayment schedule of five years for general-purpose loans and 15 years for residential loans. You may elect to extend the payoff period, however.
If you can demonstrate financial hardship, you can take an in-service withdrawal before reaching age 59½, but your withdrawal will be subject to an early withdrawal penalty equal to 10 percent of earnings on the distributions.
TSP participants who have separated or are retired have other options if they want to withdraw TSP funds before age 59½. Generally they are subject to the 10 percent early withdrawal penalty, but several exceptions are allowed.
One exception allows for penalty-free distributions to any account owner who separates or retires from service during or after the calendar year in which he or she reaches age 55. If you meet this requirement, you will have access to your vested TSP balance, without penalty, from the date of separation onward. It doesn’t matter how much service you have or what retirement system you’re under.
Another exception to the early withdrawal penalty is allowed, regardless of when you separate, if you take distributions as a series of Substantially Equal Periodic Payments (SEPPs). This is a pre-determined series of payments designed to last over your lifetime. There are three methods of computing the amount of each distribution; what they have in common is that the computed distributions must continue, uninterrupted, for at least five years or until you reach age 59½, whichever is longer.
No other distributions or contributions may be made during the period.
You can also avoid the penalty at any age by using part or all of your TSP balance to purchase an immediate life annuity after separating or retiring from service. This produces a regular stream of income that is guaranteed to last for life.
One advantage of the SEPP option, as opposed to the life annuity option, is that it allows you to retain ownership and control of your savings – both your TSP balance and the funds you withdraw. With the life annuity, you forfeit ownership and control of the principal used to purchase the annuity.
Buying a life annuity is an irreversible commitment and should be done only after careful consideration.
Those who separate or retire may also roll a TSP balance over to an IRA, which has slightly different rules for early withdrawal. While in some cases, this may provide more flexible access to your money, keep in mind that your money will be leaving the most efficient retirement investment vehicle available anywhere.
Other cases in which separated or retired employees can withdraw TSP funds without penalty before age 59½ are for total and permanent disability, death of the account holder, certain court-ordered payments and qualifying medical expenses. These exceptions are rare and based on circumstances that are largely outside the control of the plan participant.
You may learn more about all of the exceptions to the early withdrawal penalty by reading TSP’s “Important Tax Information About Payments from Your TSP Account.” (Go to www.tsp.gov, click on Forms and Publications, then click on Publications, then click on Tax Notices.) You may access your TSP account any time after you separate from service, without penalty, as long as you do it in a way that meets the requirements for an exception under the rules.
Written by Mike Miles
For the Federal Times
Publication February 23, 2009