Myth-conception: Any money I withdraw from the Thrift Savings Plan before I reach the age of 59 1/2 will be subject to a 10% early withdrawal penalty.
Reality: As long as I have retired in the year in which I have reached the age of 55 (or later), there will be no early withdrawal penalty on any TSP withdrawals. There are also some other exceptions to the early withdrawal penalty.
You do not have to be 59 ½ or older to avoid an early withdrawal penalty when taking money out of your Thrift Savings Plan. The reason many people believe that you must reach 59 ½ to avoid the 10% early withdrawal penalty is because of the rules surrounding IRAs. Individual Retirement Accounts pre-dated the TSP by over ten years, and one of the rules that still applies to all traditional IRAs is that any money withdrawn before the age of 59 ½ (with very limited exceptions) is subject to an early withdrawal penalty of 10% of the amount withdrawn.
The TSP is not an individual plan, it is an employer sponsored plan and, though similar to an IRA in many ways, it has some significant differences. One of those differences is the age at which the early withdrawal penalty kicks in. In an employer sponsored plan, any individual who retires and withdraws the money in the year in which they reach the age of 55 (or later) is not subject to the early withdrawal penalty. All of the criteria for voluntary (not early) retirement for non-special category employees, either CSRS or FERS, require that the individual retiring be at least the age of 55. Therefore, an employee retiring at their minimum retirement age with 30 years of service will not be subject to the early withdrawal penalty. Neither will one retiring at age 60 with 20 years, nor one retiring at age 62 with 5 years.
What if an employee retires before the year in which they reach 55? That might be a regular employee leaving under a voluntary early retirement authority (VERA), or it might be a special category employee such as a law enforcement officer or firefighter who is allowed to voluntarily retire at an age under 55 if they have at least 20 years of qualifying service. That person would be subject to the early withdrawal penalty for any money they took out up to the age of 59 ½. There are ways to avoid this penalty for those who leave at an early age, though the ways are fairly restrictive.
- The first way is to withdraw the money in substantially equal periodic payments based on the IRS life expectancy table. If the individual deviates from the table before reaching 59 ½ , he/she will be subject to the penalty for all withdrawals made up until 59 ½. Many people familiar with this method of withdrawal call it “following IRS Rule 72 (t)”.
- The second way is to purchase a TSP annuity.
Other exemptions are:
- Automatic enrollment refunds
- Made as a result of a total and permanent disability
- Made due to the participant’s death
- Made from a beneficiary participant account
- Made in a year when deductible medical expenses exceed 7.5% of adjusted gross income
- Order by a domestic relations court
It is important to note that, if an individual transfers their TSP account to an IRA, they will be governed by IRA rules. For example, if an employee who retired at age 56 (and was therefore not subject to an early withdrawal penalty from the TSP) rolled their money over into an IRA, they would be subject to the early withdrawal penalty on anything they withdrew from the IRA up until the age of 59 ½.