In a perfect world, nobody would have to withdraw from their TSP before it was time. But life isn’t perfect, and too often, we find we have no choice but to resort to early TSP withdrawal. But is this the only way? After all, if you withdraw early, you could end up with just a little over half of your money. There are several reasons for this: the possible 10% penalty for early withdrawal, the income taxes paid on the total, and a likely 20% withheld by your future employer if you go on to a new job and do not transfer your TSP funds to an IRA within 60 days.
The best solution, of course, is to talk to a financial professional. Your TSP withdrawal will be complicated to understand, but there are ways to withdraw that will minimize the penalties associated with early TSP withdrawal. Some of those are:
- Avoiding the early withdrawal penalty
Typically, an early withdrawal will take away 10% of your total TSP fund, but unlike an IRA, the TSP offers a workaround. This workaround has a tiny window of opportunity, but if you retire from federal service before the year you turn 50 or 55, and follow a life-expectancy withdrawal method, for either five years or until you are 59.5 (whichever is longer) you will be exempt.
- Check if you are a special category employee
Special Category Employees, or SCE, are exempt from the early withdrawal if you retire after you turn 50. There are several SCEs that may be eligible for this, such as a law enforcement officer, firefighter, air traffic controller, nuclear materials courier, Supreme Court or Capitol Police Officer, Customs and Border Protection Officer and DSS Special Agent with the Department of State.
- Try borrowing from your TSP rather than withdrawing
It is not always necessary to completely commit to withdrawing from your TSP. If you have a low credit score, the interest rate on TSP loans is usually better than going to a bank or other lender. Remember that you must still be in pay status to earn a loan since the TSP payments you make are through payroll deductions.
When withdrawing for reasons of financial hardship, there are special requirements that may apply- you must have a demonstrable need, meeting one of these four conditions:
- Recurring negative monthly cash flow
- Medical expenses (including household improvements needed for medical care) that you have not yet paid and that are not covered by insurance
- Personal casualty loss(es) that you have not yet paid and that are not covered by insurance
- Legal expenses (such as attorneys’ fees and court costs) that you have not yet paid for separation or divorce from your spouse
All in all, early TSP withdrawal is generally not a good idea. However, every case is different. Find a financial professional you trust and talk to them about your plans.
Kelly Fasterling has worked for many years to help people achieve their financial freedom goals. As an independent financial advisor, she educates clients at or near retirement on strategies to position their assets to maximize benefits and create peace of mind.