Here’s How to Take Early TSP Withdrawals Without a Penalty

Early TSP withdrawals are generally penalized, but there are some instances where it can be done without the extra penalty.

As federal employees approach retirement age, they may find themselves needing to withdraw money from their Thrift Savings Plan (TSP) accounts to cover expenses. Most everyone knows that if you try to withdraw money from your retirement accounts and you’re not old enough, you’ll be subject to a 10% penalty.

Once and only once have we had this penalty waived during the COVID pandemic in 2020. If you claimed a hardship, then you were able to withdraw up to $100,000 from a qualified retirement account, 401(k), TSP, or IRA and avoid the 10% penalty if you were younger than 59 ½. If you wanted to, you could pay this back over the next three years.

That being said, is there anything else allowing a penalty-free withdrawal from the TSP or other retirement accounts? There is.

If you separate from federal service, meaning you leave your federal job, whether retired or resigned, and you have attained the age of 55 or older, you can access the funds penalty-free. That’s right, no 10% penalty. The TSP notes in its tax guidance for plan participants:

The additional 10% tax generally does not apply to payments made after you separate from service during or after the year you reach age 55 (or the year you reach age 50 if you are a public safety employee as defined in section 72(t)(10)(B)(ii) of the Internal Revenue Code)

Suppose you are a federal law enforcement officer or firefighter. In that case, your “special category” even allows avoidance of the 10% penalty when you turn age 50 and then separate from federal service or retire.

Why does this matter? For several good reasons, it can be a lifesaver.

If you retire at your minimum retirement age (MRA) and 30 years, but you are not 59 ½, you may be needing some money. Your retirement check and the FERS Special Retirement Supplement SRS may be coming in monthly, but you may want blocks of money for various reasons. Relocation to a new state in retirement is quite common, or the purchase of a new vehicle, or a trip you always wanted to take while you’re young enough and healthy enough to truly enjoy it.

Perhaps your kids need a down payment on their first home, or your grandkids need braces, or you have an elective surgery you want to get done, or to clean up some bad debt with high-interest rates. Not to worry, you can withdraw from the TSP knowing that that 10% penalty will be waived. Even if you are deferring your pension until a later date, since you separated from service the year you attained age 55, you are allowed to take a portion or all of the TSP, penalty-free.

Beware of a Large Tax Bill

A word of caution here, as I have seen some individuals withdraw all of the money from their TSP accounts without rolling it over to an IRA, and then they suddenly realized they have a massive tax bill. A ship with no rudder is tossed about with no direction. Create a plan with direction and understand what that plan is. It will include income planning, investment planning, tax planning, and legacy planning, and then have it written down and executed according to “the plan.”

This bit of information regarding the penalty-free provision at age 55 is often a big surprise to both near-retirees and federal retirees since 59 ½ is a mantra repeated so often that it seems to be law. Most times, it is law, but not in the case of TSP if a federal employee separated from federal service at age 55.

Here’s to a productive retirement!

CD Financial is a Registered Investment Adviser. CA LIC #0G46793. Investing involves risk, including the potential loss of principal. Any references to security or guaranteed income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. CD Financial is not affiliated with the U.S. government or any governmental agency.

About the Author

Charles Dzama is the principal founder and director of CD Financial, the host of the CD Financial YouTube channel, and the author of FedWise, a free monthly newsletter focused on topics of importance and interest to federal employees. He has been assisting federal agencies and federal employees for well over 15 years in fully understanding their benefits. For a complimentary 15-minute phone call, click here to schedule. To request retirement training at your agency, email Charles your workforce development or HR trainer’s contact info.