If you are a federal employee or an active member of the military, one of your available benefits is the Thrift Savings Plan (TSP). TSP funds allow you to stash away tax-deferred savings, much like an Individual Retirement Account. However, just as with an IRA, you are restricted from withdrawing money from a TSP except under stringent circumstances. You must face the tax or other financial consequences if you make an irregular withdrawal from the TSP.
Thrift Savings Plans
Savings that you place in a TSP are exempt from federal income taxes until you receive cash withdrawals from the fund. You are eligible to make contributions to a TSP as long as you remain employed by the federal government, or as long as you remain an active member of the military. If you leave your federal job or receive a military discharge, you may roll over the funds from your TSP directly into a traditional IRA with no tax penalty. You can also transfer funds from a traditional IRA into a TSP, also without federal income tax penalties. Once you begin receiving payments from the TSP, the IRS assesses a mandatory tax of 20 percent if you receive the funds as a one time payment. Tax rates vary if you elect to receive monthly payments or purchase an annuity with the funds. If your TSP contains funds earned while you were on active duty in a combat zone, those funds are not taxed.
Penalties for Financial Hardship Withdrawal
If you run into a period of financial hardship and you absolutely need cash, you may make what is known as a financial hardship withdrawal from your TSP. The money you receive will be subject to federal and state income tax. If you are younger than age 59 1/2 when you make the withdrawal, the IRS will also hit you up for a 10 percent penalty for early withdrawal. You will also be unable to contribute to the plan again for six months. Finally, if you participate in the Federal Employees Retirement System (FERS), you will miss out on Agency Matching Contributions for the period when you cannot make contributions.
Penalties for Age Based Withdrawals
You may also make a partial age-based withdrawal from your TSP while you are actively employed if you are age 59 1/2 or older. If you receive the money directly, it will be subject to the mandatory 20 percent withholding from the IRS, but you can avoid the withholding by transferring the funds directly to a traditional IRA or eligible retirement plan provided by an employer . You will not be able to make a second partial withdrawal from the same TSP after you retire.
Alternatives to In-Service Withdrawals
An alternative to making an in-service withdrawal is to borrow against the balance of your TSP. You may only borrow as much as you have actually contributed to the TSP, plus any earnings on those contributions. You must repay the loan with interest, and payments are made through payroll deductions. However, you avoid the tax and contribution penalties involved with a cash withdrawal from your TSP.
- My Federal Retirement: Guide to Thrift Savings Plan (TSP) and Individual Retirement Accounts (IRAs); April 2002
- Thrift Savings Plan: Withdrawing Your TSP Account
- Thrift Savings Plan: In-Service Withdrawal Basics
- Thrift Savings Plan: Financial Hardship In-Service Withdrawals
- Thrift Savings Plan: Age-Based In-Service Withdrawals
- Thrift Savings Plan: Important Tax Information About Payments From Your TSP Account; December 2010
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