Q: I am a Postal Inspector in an ISLE (Inspection Service Law Enforcement) position which is equivalent to an 18-11 GS position. I am eligible to retire in May 2015 with 20 years of service at age 51. If I retire when I am eligible but do not withdraw my TSP funds can I still do so when I turn 55 without a penalty? Or do you have to separate and begin to with draw the funds at age 55 to avoid the penalty?
A: The 10% early withdrawal penalty is something that can catch special category employees, such as yourself, unaware. You actually have to separate in the year in which you turn age 55 or later to avoid the penalty. If you retire at age 51, as you hope to, you will be subject to the early withdrawal penalty up until you reach 59 1/2.
But, don’t despair; there are ways to avoid it. If you withdraw your money is substantially equal periodic payments following the IRS life expectancy table for the longer of 5 years on until you reach 59 1/2, you will be exempt from the penalty. There are other ways of avoiding the penalty (generally by following IRS rule 72(t)), but all require that the payments be substantially equal.
The best discussion I’ve even seen of avoiding the penalty is in the FERSGUIDE for federal agents. It is available for $5.00 through the end of December at http://fersguide.com. After the end of the year the cost increases to $10.00, but it’s a bargain as it is one of the few retirement guides written for federal agents (and is written by a former federal agent from the FBI).