‘In-Service’ Withdrawals and Your TSP

March 21, 2017 2:57 PM , Updated August 15, 2020 9:36 AM
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Federal employees are allowed to withdraw money from the Thrift Savings Plan while still working for two reasons: financial hardship and age. The TSP refers to these withdrawals as “in-service” withdrawals.

Financial Hardship Withdrawals

There are only four allowable reasons for taking a financial hardship withdrawal from your TSP account:

  • Negative monthly cash flow. The TSP provides a worksheet to help you determine whether you have negative cash flow (and the amount of the negative cash flow) as part of form TSP-76, Financial Hardship In-Service Withdrawal Request.
  • Medical expenses that you have not paid, that are not covered by insurance and are eligible for deduction as a medical expense on your federal income tax return. This can include any household improvements (e.g., wheelchair ramp, etc.) that are needed for medical care.
  • Personal casualty losses that you have not paid, that are not covered by insurance and are eligible for deduction (or would be eligible, regardless of income limits, etc.) as a casualty loss on your federal income tax return.
  • Legal expenses related to separation from your spouse or divorce that you have not yet paid. These are limited to unpaid attorney’s fees and court costs and do not include items such as court ordered payments to a former spouse.

Financial hardship in-service withdrawals are limited to whichever is smaller, the amount of your contributions and earnings or the amount of your demonstrated hardship. You are also prohibited from contributing to the TSP for six months following the processing of your withdrawal.

You do not have to submit either income information or documentation of expenses with your application, but the TSP says you should “retain such information and documentation for future reference.”

If you take a financial hardship withdrawal and are under the age of 59 ½ you may have to pay the 10% early withdrawal penalty.

In their publication on in-service withdrawals, the TSP spends some time encouraging those who are looking into taking a financial hardship withdrawal to consider taking a TSP loan instead. They list some valid reasons for doing so, including:

  1. A withdrawal permanently depletes your account, while a loan can be re-paid;
  2. If you take a loan you can still contribute to your TSP, while with an hardship withdrawal you cannot contribute for six months; and
  3. You can take a general purpose loan for any reason, while a hardship withdrawal can only be taken for specific reasons (outlined above) relating to financial hardship.

Age-Based In-Service Withdrawal

There is only one requirement for an age-based in-service withdrawal; you must be at least 59 ½ years old. Other items of interest about age-based in-service withdrawals are:

  • You are only limited in what you can withdraw by the amount of your vested account balance. As long as you have been a federal employee for at least three years, you are vested in your entire account balance.
  • Under current TSP rules, if you take an age-based in-service withdrawal, you are precluded from taking a partial TSP withdrawal after you separate from federal service.
  • An age-based in-service withdrawal is considered an eligible rollover distribution for federal income tax purposes. If you do not roll it over, there is a mandatory minimum withholding level of 20%.

Be aware that if you have both Traditional and Roth balances in your Thrift Savings Plan account, all withdrawals (including both types of in-service withdrawals) must be taken proportionally from your Traditional and Roth balances.

Agencies can request to have John Grobe, or another of Federal Career Experts' qualified instructors, deliver a retirement or transition seminar to their employees. FCE instructors are not financial advisers and will not sell or recommend financial products to class participants. Agency Benefits Officers can contact John Grobe at [email protected] to discuss schedules and costs.

© 2020 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.


About the Author

John Grobe is President of Federal Career Experts, a firm that provides pre-retirement training and seminars to a wide variety of federal agencies. FCE’s instructors are all retired federal retirement specialists who educate class participants on the ins and outs of federal retirement and benefits; there is never an attempt to influence participants to invest a certain way, or to purchase any financial products. John and FCE specialize in retirement for special category employees, such as law enforcement officers.