The rule of 55 is a great feature of your Thrift Savings Plan that helps early retirees. This IRS rule means that those who leave service in the year they turn age 55 or later can take TSP withdrawals without penalty.
What is the Rule of 55?
The Rule of 55 is an IRS rule that allows federal employees to access their TSP accounts prior to age 59.5. It applies to not only the TSP but to other workplace plans including 401(k) and 403(b) plans.
If a federal employee retires or leaves federal service during the year that he or she turns age 55, this rule allows taking withdrawals from his or her TSP account without being subject to the 10% early withdrawal penalty.
This is different from an IRA which does not allow for withdrawals until age 59.5.
Misconceptions about the Rule of 55
I have seen two common misconceptions about how this rule works.
Misconception #1 – You must meet FERS retirement requirements
This is not correct. Anyone leaving service in the year they turn 55 has access to their TSP without penalty. There is no requirement for years of service that needs to be met.
Misconception #2 – I will have access to my IRA at age 55
This is inaccurate as well. Access to IRAs begins at age 59.5. The only way to access your IRA before that age is to set up 72t payments.
This option means that you withdraw funds from your IRA based on one of the methods the IRS allows, and you must take the same payment out for a time period of at least five years or until age 59.5, whichever is later. It would be advisable not to do 72t payments if you don’t have to because of a lack of flexibility.
Law enforcement and Special Category Employees (SCEs) are different
In the past, public safety employees (SCEs) have been able to access their TSP accounts if they are separated from service in the year they turn age 50. However, in December 2022, the rules were amended to include “age 50 or 25 years of service under the plan, whichever is earlier.” With this change, federal SCEs can now access their TSP prior to age 50 if they separate after 25 years of service.
Practical Application
The key takeaway for federal employees is to be very careful when transferring funds from the TSP. I’m not saying you shouldn’t do a transfer (TSP has its issues) – many retirees choose to move their TSP to an IRA once they retire – but moving all of your TSP assets would be a mistake if you want access to your funds.
Instead, consider how much you expect to withdraw prior to age 59.5 and leave at least that amount in TSP. I would even recommend leaving an extra 10% to provide yourself with a buffer. You can also transfer funds back into your TSP as long as you keep it open.
And if you are a federal LEO and you retire at age 47 with 25 years of service and move on to a 2nd career, you still have penalty-free access to TSP.
